Crypto credit cards: a risk to decades of fighting financial crime?

How was Coinbase able to satisfy ‘know your customer’ laws for its co-operation with Visa?

The Coinbase cryptocurrency exchange website. Photograph: Chesnot/Getty

The Coinbase cryptocurrency exchange website. Photograph: Chesnot/Getty


In the battle against international money laundering, cryptocurrency remains the weakest link. Users can receive payments from unknown sources from around the world, which makes it hard for the network to keep out the proceeds of crime – ransom cyber attacks, drug trafficking or worse.

An extensive network of dealers also buys or sells crypto against cash.

Until now it has been relatively difficult to transform illegally earned crypto into real economy spending power. Few merchants accept cryptocurrency, so those sitting on illicit gains must exchange crypto into conventional, or fiat, currencies.

That involves taking foreign exchange risks and then transferring the fiat money through wallet and exchange services into the core banking system. The end point is a bank account, which is significantly harder to obtain than a crypto wallet.

As a result, criminally obtained cryptocurrency is still mostly contained in terms of real-world spending. Any big cash-out spree by the dark economy also bears the risk of crashing the entire crypto market, which puts many people off taking money out.

This is changing. One of the biggest gateways into the core financial system, the Visa network, is opening itself up to crypto-funded debit cards.

Others have tried to launch such crypto cards before but failed for compliance reasons. Visa’s latest co-operation with Coinbase for a UK crypto card is different. The cryptocurrency exchange says the card will allow customers to “spend funds from your cryptocurrency wallets” anywhere Visa is accepted – basically everywhere.

The card’s spending limit starts at a whopping £10,000 a month, rising to £20,000 for customers who meet certain criteria.

Satisfying regulations

This invites the question of how Coinbase was able to satisfy anti-money laundering and “know-your-customer” regulations.

The regulatory environment around crypto has been evolving, and some wallet providers and exchanges now operate with official blessing under specially devised compliance rules. But most still exist in regulatory vacuums, and criminals who are technically sophisticated can operate wallets without any oversight at all.

In theory that means anyone with a Coinbase account has the potential means to receive payments from an illegitimate source with little or no barrier. Visa says that it subjected this partnership to “enhanced” scrutiny and noted that Coinbase is regulated by US authorities.

Although Coinbase often blocks accounts because of suspicious activity, I find it hard to believe that their system can eliminate risks entirely. Even if crypto exchanges and wallets comply with know-your-customer rules when someone applies for an account, crypto’s anonymous nature compromises their ability to monitor the legitimacy of transactions from then on.

The only solutions I can see would be for them to routinely block payments derived from wallet addresses hosted by unregulated players or to individually scrutinise all unknown counterparties. This would incur huge costs and defy the ideological tenets of the crypto movement, which sought to create a parallel and anonymous value network outside of core banking.

Cost and risk

Even in the core banking system, the cost and risk of dealing with potentially non-compliant correspondent banks in countries with light-touch regulation has led institutions in places with stricter scrutiny to purge their banking relationships.

If core banks cannot afford such relationships, how is it possible that crypto ones can?

There are already sizeable fees associated with managing crypto exchange and liquidity risk – 2.49 per cent of each transaction in the Coinbase case. The whole thing risks turning into an uncompetitive luxury service.

Either way, forcing crypto institutions to operate in a similar way to the core banking system is a must if the sector is to be allowed access to the core system via the Visa network. It’s the only way to maintain a level playing field and ensure that 30 years of action against financial crime is not squandered. – Copyright The Financial Times Limited 2019

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