In digital finance, cryptocurrencies have become a major player. With the rise of Bitcoin, Ethereum and other digital currencies, more people and businesses are engaging in crypto transactions. However, one problem that many cryptocurrency users have recently faced is the freezing of their accounts by banks.
This can create significant disruption, especially for companies that base their actions on seamless transactions. In this article, we’ll analyse the reasons why banks freeze crypto accounts, provide examples of such instances, and share strategies that businesses can use to protect their crypto accounts and ensure trouble-free banking relationships.
How does the risk of a crypto account being blocked arise?
The relationship between banks and cryptocurrencies is complex. While cryptocurrencies offer an innovative and decentralised form of money, they also bring some unique challenges for banks and financial institutions. That’s because banks are strictly regulated and must comply with various legal requirements, such as anti-money laundering (AML) rules and know-your-customer (KYC) regulations. These compliance rules can restrict banks flexibility in responding to new financial trends.
Crypto transactions are speedy, faceless, and borderless, making it difficult for banks to monitor and track them. Therefore, banks may choose to freeze crypto-related accounts when they identify a potential risk or when they believe that the account holder may not be complying with relevant laws and rules. Here are some of the common reasons banks freeze crypto accounts:
Suspicion of illegal activity
Banks are obligated to prevent illegal activities such as money laundering, terrorist funding, and fraud. Cryptocurrencies, however, can be used to transfer large sums of money across borders without a central authority, which makes them attractive to individuals seeking to disguise illicit activities. As a result, banks remain vigilant, ready to block any suspicious activity. Thus, if a bank suspects an account is involved in illegal cryptocurrency transactions, it can freeze the account for further investigation.
Failure to comply with KYC/AML regulations
Banks are duty-bound to verify that their customers are legitimate, which is why they implement KYC (Know Your Customer) and AML (Anti-Money Laundering) controls. If a customer does not comply with these procedures or if a crypto account does not provide sufficient documentation, the bank may freeze the account as a precautionary measure. This is particularly applicable to cryptocurrency exchanges or businesses that process numerous transactions but do not meet regulatory standards.
Risk of volatility
Cryptocurrencies are known for their wild price fluctuations. This volatility can cause problems for banks, particularly if a customer’s cryptocurrency holdings quickly lose significant value. Banks may freeze accounts to protect themselves from exposure to the risks associated with these price movements. In some cases, banks may also freeze accounts that are involved in “speculative trading” or that show signs of “pump-and-dump” schemes, which are considered high-risk.
Regulatory uncertainty
As the legal framework around cryptocurrencies is still evolving all over the world, banks often find themselves caught between the need to comply with national and international regulations and, at the same time, the unpredictability of cryptocurrency laws. Because of this uncertainty, banks may take a cautious approach by freezing accounts that are involved in cryptocurrency transactions until the legal framework becomes clearer.
To understand the potential impact of frozen crypto accounts, here are two examples of such incidents.
Binance and the UK Financial Conduct Authority (FCA)
In 2021, the UK’s Financial Conduct Authority (FCA) issued a warning against Binance, one of the largest crypto exchanges in the world. The FCA prohibited Binance from offering certain services to customers in the UK, citing concerns over its failure to comply with UK regulations. As a result, UK banks began freezing accounts associated with Binance, affecting thousands of crypto users.
Many users found themselves unable to transfer their funds, which caused frustration and confusion. The situation highlighted the importance of regulatory compliance and the risks associated with dealing with crypto exchanges that do not follow local rules. In this case, users who had their accounts frozen had to wait for the issue to be resolved, often facing delays in accessing their funds.
Crypto Exchange Bitfinex and USDT
Another example of account freezes occurred with the crypto exchange Bitfinex , which is based in Hong Kong. In 2017, Bitfinex had its bank accounts frozen by a bank in the United States due to regulatory concerns. The issue arose when the exchange was accused of mismanaging funds and not meeting anti-money laundering standards. This led to the freezing of Bitfinex’s accounts, and users faced delays in withdrawals and deposits.
The freeze lasted for several months, causing significant disruption for Bitfinex users who could not access their funds during that time. Eventually, the exchange managed to resolve the issue, but the incident highlighted the challenges that crypto exchanges face when dealing with traditional financial institutions.
How to avoid freezing of crypto accounts
To avoid situations like those outlined above, individuals and businesses dealing in cryptocurrencies, must take steps to ensure their accounts remain active and compliant. Here are three effective strategies that businesses can use to protect their cryptocurrency accounts and avoid having them frozen.
1. KYC/AML procedures
The first step in preventing your cryptocurrency account from being frozen is to make sure you comply with KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations. Understanding this is half the battle, as banks are required to verify the identity of their customers and monitor transactions for suspicious activity. We recommend that you provide your bank with correct, complete data at all times. This should include obtaining a government-issued ID, proof of address and other documents to prove customer legitimacy.
2. Reputable crypto exchanges
When engaging in crypto transactions, it is essential to work with reputable and well-regulated crypto exchanges. Banks are more likely to freeze accounts associated with exchanges that do not comply with local laws or have a history of regulatory issues. To avoid this, businesses should ensure they are using exchanges that are transparent about their operations and meet the necessary requirements.
Look for exchanges that are licensed by financial authorities in their jurisdiction and that provide detailed information about their compliance with AML and KYC regulations. Many exchanges also offer additional security features, such as two-factor authentication and cold storage for digital assets, which can further protect funds and the account from being compromised.
3. Legal updates
Cryptocurrency regulations are constantly evolving, and staying informed about these changes is crucial for maintaining a healthy relationship with banks. Businesses in the crypto industry should regularly monitor updates from regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK or the Securities and Exchange Commission (SEC) in the United States, to ensure they are always in compliance with the latest rules.
Establishing a relationship with legal advisors who specialise in cryptocurrency regulation can also help businesses stay ahead of any changes that may affect their crypto accounts. These advisors can provide guidance on new laws and offer strategies to ensure that businesses remain compliant with all regulatory requirements.
Bottom line
Cryptocurrencies have shaken up the financial industry, offering new opportunities for both individuals and businesses. However, these opportunities come with significant risks, particularly when it comes to dealing with traditional financial institutions. Banks are freezing cryptocurrency accounts for a variety of reasons, including concerns about illegal activity, non-compliance with KYC/AML regulations, and uncertainty in regulatory environments.
By collaborating with reputable crypto exchanges and staying informed of regulatory changes, businesses can protect their cryptocurrency accounts and avoid account freezes. By taking these steps, they can safeguard smooth transactions, reduce the risk of disruption, and maintain a firm relationship with their banking partners.
Read our article: “Crypto Tax-Free Countries in 2025” for more industry insights.
Looking for your own strategy to protect your crypto account? Get in touch with our experts and book a free consultation today. We know how to help you.
Disclaimer
Widelia and its affiliates do not provide tax, investment, legal or accounting advice. Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, investment, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please consult
