Compliance is a word that often crops up in discussions around Bitcoin, though it generally takes a backseat to terms like ‘bounce’, ‘pump’ and ‘moon.’ Those who hold the cryptocurrency – and those who delightedly document its thrilling price movements – generally focus on its speculative appeal. But despite huge institutional inflows from the likes of MicroStrategy and Tesla in recent months, there remains an unsettled question: who regulates Bitcoin?

Bitcoin: A law unto itself

Unlike a national fiat currency, Bitcoin doesn’t operate under the auspices of a centralised authority. The cryptocurrency depends on the activity of the world’s miners, whose confirmation of block transactions yields reward payouts that illustrate the asset’s fixed monetary supply. If the digital currency belongs to anyone, it’s the miners and those who buy their newly-minted BTC and therefore have skin in the game.

If rumors are to be believed, several large global banks are now considering getting into the Bitcoin business. According to Tom Robinson, co-founder of crypto compliance firm Elliptic, there has been a surge in inquiries from major banks who are contemplating launching their own crypto services. On the face of it, this makes perfect sense. Financial institutions are accustomed to being the only show in town in terms of money issuance, and yet have stood on the sidelines while cryptocurrency captivated first retail, then big companies, and now, inevitably, banks and governments themselves.

That’s not strictly true, of course: banks have been indirectly involved in crypto for some time now, through partnerships with major cryptocurrency exchanges like Coinbase and Binance. Now, though, they may take the direct route.

Because why let PayPal have all the fun? The payment giant announced support for several cryptocurrencies in October, enabling its 346 million users to buy, sell, hold and even spend crypto via 26 million participating merchants. America’s oldest bank, BNY Mellon, subsequently confirmed that it would hold and issue digital assets on behalf of its asset-management clients, citing an “uptick in institutional interest.”

How banks might offer Bitcoin

So, how might banks interact with Bitcoin? As mentioned, they can’t control it. However, there are a few avenues they could take. For instance, they might emulate PayPal by offering a buy and sell service, and preventing users from moving their crypto out of the bank. In other words, customers will be able to buy Bitcoin from within their banking app, and spend it using a bank card/mobile app, but they’ll be forbidden from sending it to a hardware wallet. 

In this scenario, the bank would essentially function as a walled garden. Incidentally, PayPal’s crypto service is powered by Paxos Trust Company, a crypto brokerage; banks looking to offer their own crypto services will likely have to form a similar partnership.

Alternatively, banks could custody crypto themselves after stockpiling their own reserves. This action would surely usher in a new era in crypto: one of licenses, registrations, and regulations galore. While several crypto exchanges have avoided regulators by basing themselves in far-flung locales and taking advantage of muddy regulatory waters, banks are more likely to be sanctioned and penalised for improper risk management processes, among other things. 

As noted in one CoinDesk op-ed, “If KuCoin was a UK bank and had got hacked, we’d have had an army of auditors looking at every paper inside the bank and announcing a major fine and a new set of controls.”

While the emergence of Bitcoin banks is likely to provoke suspicion from many quarters, it could also see the asset’s value rocket. Whatever happens, the next few years are going to be fascinating.