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Malta, a country with fewer than 500,000 people, relishes its unofficial title as ‘Blockchain Island.’

But the Mediterranean island is not quite the paradise it aspires to be, and many projects are still struggling to set up shop. Despite government attempts to create the first DLT-friendly jurisdiction, securing a full banking partner is proving to be difficult.

An investigation by the Times of Malta found that many crypto businesses are being turned away by banks, who feel the industry is outside of their “risk appetite.” Although some banks are prepared to do business with blockchain projects, many banks worry about working with crypto companies and exchanges due to a perceived “AML overhead.”

Dominic Melo is the chief product officer at iSignthis, an Australian fintech company, which periodically releases reports on the regulatory landscape. Melo says that banks in Malta and elsewhere are concerned about how to ensure that clients’ funds meet regulatory standards.

The main concern, Melo explained, is that the high cost of KYC/AML compliance makes partnerships with crypto businesses prohibitively expensive. “It’s not typically profitable for [Maltese] banks to house client funds for other licensed entities,” he wrote to Crypto Briefing. 

Malta’s government has made it a priority to provide a regulatory framework for crypto businesses, and the national parliament passed three DLT bills last September.

The new laws were designed to make the country one of the most desirable jurisdictions for blockchain companies.  The government was seeking to provide  “legal certainty”  to the new industry, according to Silvio Schembri, Malta’s Junior Minister for Financial Services, Digital Economy and Innovation.

But there are concerns on how effective such regulation actually is. In January, the International Monetary Fund (IMF) said that holes in Malta’s legal framework and an overstretched regulator could endanger its AML controls.

“The increasing number of financial entities under supervision, the rapid development of new products, the evolving regulatory environment and the tightening of the labour market have put the Malta Financial Services Authority under considerable strain,” the IMF told The Times of Malta. 

Melo believes there’s more to the story. Financial institutions may be reluctant to engage with the new DLT sector, he says, because they are worried it may jeopardize relationships with correspondent banks (CBRs).

CBRs allow banks to accept deposits abroad as well as facilitate international transactions. They also allow banks to offer services in other jurisdictions. Without ready access to the worldwide network, many banks would not be able to operate.

This would drive up the costs of financial services, making them inaccessible for a large number of people.

According to Melo, CBRs with U.S. banks form the lifeblood of the banking industry, including banks situated in Malta. They provide instant leverage for deposits as well as access to U.S. treasuries, which are among the most high-yielding government securities available.

“One way commercial banks make money is by buying U.S. Treasuries, to lose your USD correspondent effectively cuts off a bank from the Global Financial System and one of its most profitable sources of income from parked client funds,” he said.

For the time being, business in Malta is booming. The country welcomed Binance’s exchange and charity arms last year, and there is already a burgeoning secondary market. When Crypto Briefing visited for the Malta Blockchain Summit (MBS), lawyers and accountants specializing in crypto-related law occupied most of the conference hall stands.

Deborah Vella, the senior manager at E&S Group, a legal advisory firm for cryptocurrency and blockchain businesses in Malta, admitted that banks have “numerous concerns” about taking on crypto projects as clients.

But in the long term, Vella didn’t think these concerns would prove to be much of an obstacle. Companies continue to enhance their business development in Malta, she says, and E&S has helped more than 80 projects to establish themselves on the island. The problems that crypto faces on ‘blockchain island’ are found all over the world.

“Setting up crypto and blockchain related companies in Malta we do not foresee it as being problematic,” Vella said in an email to Crypto Briefing. “We believe the banking solution is a concern to all those who are opening businesses not only in Malta but all around Europe.”

The author is invested in digital assets, but none mentioned in this article.

The post On Blockchain Island, Crypto Companies Are Still Unbanked appeared first on Crypto Briefing.

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