The challenge with cryptocurrency emerges when someone wishes to withdraw a significant amount of it. Typically, someone cannot use their crypto holdings to pay off anything, for example, student loans, tax bills, or put down payment on a house since they will have to cash out into traditional currency.
Any reputable financial institution that conducts such an exchange must comply with anti-money laundering laws and must therefore decide whether to allow such a transaction to take place.
Institutions Offering Cryptocurrency
The most straightforward scenario for a financial institution is when an individual who has verified their identity with a major platform makes a bank transfer to buy cryptocurrencies, does nothing with them, and then cashes out. The institution can see that the funds were definitely legitimate when they arrived because they came from an established bank account and that nothing disreputable happened to them while they sat around in cryptocurrency form, so they can cash them out fairly confidently.
However, the further a user deviates from this simple case, the greater the risk a financial institution assumes by allowing the transfer, and it appears that the major players are becoming increasingly wary of this risk. Although some people are perfectly content to use a significant cryptocurrency exchange with KYC, transmission to and from an established bank account, and interact only with other massive crypto platforms that take steps to prevent criminal activity, this is far from the ideal scenario as most promoters present it.
How Fiat Off-Ramps Have Contributed To Centralisation
Many cryptocurrency projects explicitly aim for their transactions to be free of interference from corporations, banks, and governments. Advocates believe that traders will be able to be as anonymous as they want, known only by their random wallet address. However, it appears that the fiat off-ramps, that is, the firms that will convert the cryptocurrencies back into traditional currencies are increasingly adopting the position that is so common and also imperfect in discussions about privacy. And, while those fighting for things like strong encryption have won some hard-fought victories in favour of privacy, that is not a stance commonly held in the financial system.
Since the actions that enabled privacy and anonymity with crypto are the same as the ones that enable criminal behaviour, using cash to buy crypto, mixing currency through vessels, and using less-popular and less-centralised exchanges and platforms. Cryptocurrency exchanges and financial institutions appear to be increasingly unwilling to allow anyone who engaged in these behaviours to cash out, particularly as regulators begin to turn their eyes to the space.
People who want to engage with cryptocurrencies appear to be increasingly pressured to use only the parts of the system that resemble traditional banking, a small number of highly centralised platforms with strict KYC. If they must accept the risk that they will be unable to cash their money out later on and therefore face this problem that people are increasingly encountering.
While some may be willing to put money into cryptocurrencies with no guarantee of being able to withdraw it in traditional currency, this is not a common or feasible position for most people. It doesn’t seem realistic for cryptocurrency supporters to expect people to invest, without having to worry about converting their cryptocurrency back into cash, with the promise that maybe, someday, goods and services will be exchanged for cryptocurrency rather than traditional money.