Crypto-Entrepreneurs vs. Banks – Why Do Banks Refuse to Work with Crypto-Entrepreneurs?

Restriction of Market Access?

Generally, credit institutions (such as banks, insurance companies, and savings banks) operating in the financial market have the right to freely choose their contractual partners, which fully reflects the private law principle of freedom of contract. The principle of freedom of contract is a fundamental and characteristic feature of private law, ensuring the autonomy of the parties’ wills. Thus, parties entering into a contractual relationship may choose with whom and under what conditions they enter into it. At the same time, they are allowed to tailor their contractual relationship so that it best reflects their needs and requirements.

The principle of contractual freedom is, however, limited in certain cases. Providers of crypto-asset services, as providers of payment services, are required to establish a payment account with a bank to conduct their business. Current banking practice, however, is such that after a provider of crypto-asset services submits an application, the bank refuses to open a payment account without any justification or, in some cases, decides to close an already opened payment account without stating a reason. Unfortunately, this problem is not unique to our country; similar issues are also being faced in the Czech Republic and other European Union countries.

Section 52(3) of Act No. 492/2009 Coll. on Payment Services and on Amendments to Certain Acts (the “Payment Services Act”) provides that: “Access rules, which determine the rules of access for payment service providers and which must be established by these payment systems:

1. must be objective, non-discriminatory, and proportionate; they must not create obstacles to participation in the system beyond what is necessary to address specific risks, in particular risks associated with operational and business risk, and to ensure the protection of the financial and operational stability of the payment system,
2. must not create obstacles to participation in other payment systems,
3. must not create restrictions based on institutional status.”

The Payment Services Act does not provide for any sanction or penalty against a bank if it refuses to open a payment account for crypto-asset service providers, or if it decides to close an already opened account. The legislation even lacks an obligation for the bank to provide the applicant for an account with a justification explaining why the account was refused or why it was closed. For this reason, when a bank refuses to open or closes a payment account, it does not in any way violate the law or circumvent it.

On the other hand, this situation reveals weak protection for crypto-asset service providers. Since opening a payment account is essentially mandatory for them (due to the payment of taxes, contributions, and other obligations), such steps by banks may be regarded as restricting market access. Moreover, there seems to be no reason why companies with a generally recognized business activity in the form of a regulated trade such as providing virtual currency exchange services or virtual currency wallet services should be discriminated against compared to other companies with different business activities. In practice, crypto-asset service providers are left with no choice but to go from bank to bank hoping that one will agree to open a payment account. This problem has also been encountered by Bitcoinmat, which operates over 50 Bitcoin ATMs across Slovakia, the Czech Republic, and Greece.

On the other hand, however, it is possible to speak of weak protection for crypto-asset service providers in this context.

Generally, banks allow crypto-asset service providers to submit an application for a payment account (in most banks, this is offered as a business account product), with AML and KYC forms attached. Once completed and submitted, the documentation is typically sent to the compliance department, and the response is invariably the same: the bank refuses to open the payment account without giving any reason.

Competition for the Established Banking Sector

The approach taken by banks is, to some extent, understandable – crypto-asset service providers currently represent a form of competition for banks. Under Act No. 455/1991 Coll. on Trade Licensing (the “Trade Licensing Act”), crypto-asset service providers may currently offer their services based on regulated trades, specifically providing virtual currency exchange services and virtual currency wallet services.

However, as of December 30, 2024, these trades will cease to be regulated trades, though the provision of services related to crypto-assets will remain possible until July 1, 2026. After this date, services related to crypto-assets will only be permitted on the basis of a special license issued by the National Bank of Slovakia (“NBS”).

For this reason, crypto-asset service providers currently focus mainly on the custody of crypto-assets, the operation of crypto-asset exchanges, and also offer investment opportunities in crypto-assets. Thanks to this wide portfolio of activities and services, crypto-asset service providers can be regarded as a certain alternative to the traditional, already established banking sector operating in the financial market.

Higher AML Risk as a Reason for Refusing to Open Payment Accounts?

Given the situation described above, it is not entirely clear why banks are taking such a drastic approach toward crypto-asset service providers. At present, crypto-asset service providers fall into the group of non-bank entities. Under Act No. 297/2008 Coll. on the Prevention of Money Laundering and Terrorist Financing and on Amendments to Certain Acts, crypto-asset service providers are obliged entities (that is, they are required to report unusual business transactions). For this purpose, it is therefore essential that crypto-asset service providers have appropriate mechanisms in place to prevent money laundering as well as the financing of terrorism. In addition, they must adopt and implement an internal program aimed at combating money laundering and terrorist financing.

On the one hand, banks’ concerns about treating crypto-asset service providers as higher-risk entities for money laundering purposes are understandable. On the other hand, the European Banking Authority, in its guidance, has clearly stated that banks should ensure they do not engage in blanket refusals or terminations of business relationships with clients they have assessed as posing a higher risk of money laundering and terrorist financing. If banks do take such a step, they must ensure that they have considered all possible mitigating measures that could reasonably be applied in the given case, while also taking into account the money laundering and terrorist financing risk associated with the existing or potential business relationship. At the same time, banks should implement policies and procedures to ensure that their approach toward clients does not result in undue restrictions on customers’ legitimate access to financial services. For this reason, it can be concluded that if banks engage in blanket refusals of crypto-asset service providers, such conduct is inconsistent with the guidance of the European Banking Authority.

Crypto-Asset Service Providers as Supervised Entities

As of December 30, 2024, Regulation (EU) 2023/1114 of the European Parliament and of the Council of May 31, 2023 on Markets in Crypto-Assets and amending Regulations (EU) No. 1093/2010 and Directives 2013/36/EU and (EU) 2019/1937 (“MiCA Regulation”) will enter into full application. In this context, it is worth noting that, under the MiCA Regulation, all crypto-asset service providers within the EU will be considered supervised entities in the financial market. In practice, this means that every crypto-asset service provider will fall under the supervision of the national financial market supervisory authority, which in our case is the National Bank of Slovakia (NBS). The MiCA Regulation also introduces stricter requirements that must be met in order to conduct business in the field of crypto-assets (e.g., the obligation to prepare a prospectus for offered crypto-assets, the introduction of effective governance arrangements, effective redress mechanisms, monitoring of executed transactions, etc.).

Since crypto-asset service providers will now be regarded as supervised and licensed entities falling directly under the supervision of the National Bank of Slovakia (NBS), their position may improve in this respect. This approach will effectively “clean up” the market by removing those crypto-asset service providers that fail to meet the requirements set out in the MiCA Regulation. It can therefore be expected that the number of crypto-asset service providers will ultimately narrow. At the same time, banks will have greater certainty when opening payment accounts, as they will only be contracting with licensed crypto-asset service providers. The MiCA Regulation itself anticipates an improvement in access to banking services for crypto-asset service providers, which should ultimately ensure the smooth performance of their activities.

More Detailed Monitoring of Executed Transactions

Regulation (EU) 2023/1113 of the European Parliament and of the Council of May 31, 2023 on information accompanying transfers of funds and certain crypto-assets, and amending Directive (EU) 2015/849 (“TFR Regulation”), which will also apply as of December 30, 2024, introduces the so-called “travel rule”. This rule currently applies primarily to credit institutions, as well as to other payment service providers. Under the TFR Regulation, every executed transfer (now including transfers of crypto-assets) must be specifically identified and must contain detailed information about both the payer and the payee.

In transactions involving crypto-assets, the so-called distributed ledger technology (the “DLT”) is applied. DLT is a decentralized database that stores data on a distributed basis without a single administrator. It is a term that encompasses technologies that distribute records within the database among all users who use it. In the case of crypto-assets, completed transactions are recorded in a chain so that users can verify them and have proof that they were carried out without the need for a third party. The function and operation of DLT can therefore also be described as a tool that does not use a centralized database operated primarily by central banks, but rather a transactional database spread across an extensive computer network. Currently, banks record all executed transactions in their own local databases within a single centralized system and always with some delay. By contrast, if a transaction is executed within DLT, the changes occur instantly. Thanks to DLT, providers of crypto-asset services have greater insight into completed transactions than banks themselves. As a result, the position of crypto-asset service providers may be strengthened in the future.

Situation in the Czech Republic

Providers of crypto-asset services face the same problem in the Czech Republic as they do in Slovakia. Although the legal regulation and legislative framework in the Czech Republic is, in principle, more favorable for providers of crypto-asset services (which could place them in a more advantageous position), in practice, this is not the case at all.

The current wording of Act No. 370/2017 Coll. on Payment Systems (“the Payment Systems Act”) provides banks with the option to conclude a payment account agreement with providers of payment services that allows the account holder to provide payment services effectively and without obstacles, and without objective, non-discriminatory, and proportionate conditions. If a bank decides to refuse to open a payment account, or if it decides to close an account, it must, without undue delay, notify the Czech National Bank with justification and at the same time provide the payment service provider with a reasonable explanation of the grounds on which the payment account was not opened or the conditions under which it was closed. In addition, the bank is subject to sanctions if it fails to open an account or fails to notify the Czech National Bank with justification. These facts represent the fundamental difference between our legal systems.

In practice, however, providers of crypto-asset services still have difficulties opening a payment account with a bank. As in Slovakia, in the Czech Republic, banks also refuse to open or proceed to close payment accounts for providers of crypto-asset services. For this reason, the Czech legislator decided to amend the Payment Systems Act. Under the amendment, banks would no longer merely have the option but rather the obligation to conclude a payment account agreement with providers of crypto-asset services. The amendment is intended to strengthen the position of providers of crypto-asset services and provide them with greater protection. The adoption of the amendment is justified by the fact that, despite the existing legislative framework, banks’ approach to providers of crypto-asset services has not improved. It is also argued that the Czech National Bank has so far not imposed any sanctions for violations of the law by banks.

This raises the question of whether the approach taken by the Czech legislator is appropriate, particularly in relation to banks. It also remains to be seen how this issue will be addressed in Slovakia and whether any change will be made in the future. The need to resolve the situation can be justified not only by the fact that providers of crypto-asset services will soon fall under the supervision of the NBS due to the application of the MiCA Regulation, but also by the fact that crypto-assets use a different technology for recording transactions. At the same time, it would be appropriate to introduce mechanisms that establish the liability of banks toward their clients and also toward the NBS, following the example of the Czech legislation.

The Obligation of Czech Banks in the Event of Non-Conclusion or Termination of a Contractual Relationship

Even though banks are not legally obliged to conclude a payment account agreement or to remain in an already concluded contractual relationship, it must be emphasized that they are required to apply procedures toward their clients that are objective, non-discriminatory, and proportionate.

For this purpose, the Czech National Bank has issued guidance for banks on how they should proceed in this regard:

1. Objective reasons – this primarily includes reasons based on legislative requirements (e.g., an inadequately developed anti–money laundering and counter-terrorist financing compliance program, a material breach of contract by the payment service provider, etc.);
2. Non-discriminatory reasons – require the bank to treat the refusal to enter into or the termination of a contract with a payment service provider in the same manner as with other payment service providers or other clients in the same or similar situation (not only with respect to the business activity itself, but also primarily the risks and other related circumstances);
3. Proportionate reasons – must continually be assessed in light of the specific circumstances of the case; the seriousness of the reasons for refusing to conclude or terminate a payment account agreement (if such reasons are objective and non-discriminatory) must not be manifestly disproportionate to the impact such refusal or termination would have on the payment service provider (in particular, refusal should not occur where the issues leading to the refusal could be resolved through less burdensome measures).

As already noted above, if a bank refuses to open a payment account or terminates an already existing contractual relationship, it is required under the Payment Services Act to notify the Czech National Bank with a statement of reasons. The bank is obliged to report not only the complete termination but also any partial termination of a payment account agreement, and to do so without undue delay. The submitted notification must provide sufficient details regarding the factual circumstances of the case and the reasons that led the bank to refuse or terminate the agreement, so that the bank’s procedure can be subject to genuine review. At the same time, the bank is required to provide copies of the relevant supporting documents.

In addition, the bank must also provide the payment service provider with a statement of reasons, to the extent that other legal provisions do not preclude such disclosure. The explanation must take into account the specific situation – i.e., it must clearly communicate to the payment service provider the concrete and individualized reasons that led to the refusal or termination of the payment account agreement.

Resolving the Situation

The current conflict between banks and crypto-asset service providers has created a situation in which it is very difficult to identify the actual impact of the banks’ conduct. Since there are no available statistics in either Slovakia or the Czech Republic that could serve as a basis for addressing the issue, an undesirable situation has arisen in practice to the detriment of crypto-asset service providers.

For this reason, it would be appropriate to introduce the most effective possible mechanisms based on the bank–client–NBS relationship. Such a solution would not only impose an obligation on the bank to provide reasons for refusing to enter into or for terminating a contractual relationship with a client, but would also establish an accountability mechanism in which the National Bank of Slovakia (NBS) would have an active role. This could, for example, take the form of a requirement that once the NBS receives the bank’s statement of reasons, it must issue an opinion either confirming or rejecting the legality and legitimacy of the bank’s conduct. Conversely, if the NBS were to conclude that the bank had acted unlawfully, it could require the bank to enter into a contractual relationship with the client or to reinstate a terminated contractual relationship. Such measures could strengthen the position of crypto-asset service providers in Slovakia.

Given that the new MiCA Regulation will take effect at the end of this year, it can be expected that the legislator will adopt new, related rules governing the field of crypto-assets. The key question is to what extent such legislation will be sufficient and enforceable in practice, particularly with respect to resolving the undesirable situation described above.

References

1. Sme.sk. Podnikatelia pozor: Bezdôvodné zatváranie bankových účtov firmám aj naďalej pokračuje. Avaliable at: <https://regiony.sme.sk/c/23105745/podnikatelia-pozor-bezdovodne-zatvaranie-bankovych-uctov-firmam-aj-nadalej-pokracuje.html>.
2. See more in Article 6 of the preamble of MiCA.
3. See more in Articles 4 and 14 of TFR.
4. Kryptomagazin.sk. Aký je rozdiel medzi pojmami blockchain a DLT? Available online: <https://kryptomagazin.sk/aky-je-rozdiel-medzi-pojmami-blockchain-dlt/>.
5. Rada Euróspkej únie. Infografika – Kryptoaktíva. Available online: <https://www.consilium.europa.eu/sk/infographics/crypto-assets/>.
6. SITA. Súbor finančných nástrojov sa rozšíri o DLT technológie, analytik povedal viac. Available online: <https://sita.sk/vofinanciach/subor-financnych-nastrojov-sa-rozsiri-o-dlt-technologie-analytik-povedal-viac/>.
7. See Section 255 of the zákona o platobnom styku.
8. Návrh na vydanie zákona, ktorým sa mení zákon č. 370/2017 Sb. o platebním styku v znení neskorších predpisov. Dostupné na internete: <https://odok.cz/portal/veklep/material/KORND2HJK6GA/>.
9. Czech National Bank. Přístup k platebním účtům u úvěrových institucí pro účely poskytovaní platebních služeb. Available online: <https://www.cnb.cz/cs/dohled-financni-trh/legislativni-zakladna/stanoviska-k-regulaci-financniho-trhu/RS2023-02/>.