The rout in prices of cryptocurrencies and certain entities last year shook the sector and has left banks, wealth managers and other asking lots of questions. This article addresses some of them.
The past year was a tough one for enthusiasts of digital assets/cryptocurrencies – the fall in tech stocks did not leave those areas unscathed, while big losses to so-called stablecoins, and the astonishing developments at the FTX exchange, created the kind of publicity that left the sector feeling battered and bruised. Does that mean banks and wealth managers should give this area a wide berth, or is there a more nuanced way forward? To discuss these ideas is Jeremy Boot, head of digital assets at Temenos. The editors are pleased to share these views; the usual editorial disclaimers apply. Jump into the conversation! Email email@example.com
Last year’s crypto rout shook the industry. Where does this leave
banks, and could they be the surprise beneficiaries of the recent
turbulence? Let's dive in.
Investor interest remains
2022 was undeniably a tough year for crypto. Looking forward the future of digital assets remains a hotly debated and polarising topic.
From an investor perspective, some research points to continued interest such as Standard Chartered’s Q4 report where 62 per cent of the 15,000+ respondents felt that digital assets still have a place in investment portfolios despite recent volatility. Given the modest outlook for traditional assets such as stocks and bonds, some diversification into alternatives remains popular. Early 2023 has seen crypto rally alongside risk assets as investors leap on improving consumer price index data in the hope of slowing rate hikes.
So investors are cautious but appetite for crypto does seem to
persist. Could banks be the surprise beneficiaries?
Why banks could benefit from the crypto fallout
For people who want to hold these tokens there are two main custody options. They can self-custody with a private wallet such as a hardware device. This may work for some but comes with its own challenges. Seed phrase back-ups are at risk of hacks online, or loss or theft if kept at home. Incoming regulation may limit transfer or cash-out options, and handling tax reporting, and inheritance management is complex. Self-custody still feels clunky and difficult for the non-tech savvy masses.
The second option is to custody tokens with a third party. For obvious reasons in the post-FTX world, the CeFi players, crypto exchanges, and 'earn' products based on shady asset rehypothecation have fallen from grace. Surely all trust has evaporated for these new players to securely custody assets.
The alternative is banks – trusted, secure, properly regulated,
and fully integrated with the existing financial
So one surprise outcome of the crypto winter – and ensuing regulation that is likely to follow – could actually be closer ties with traditional finance. By offering digital asset services banks can open new sources of revenue, position themselves as digital leaders, and reinforce their appeal to younger customers who are the primary segment driving adoption.
Regulators are widely expected to crack down on crypto in an effort to clean up the industry and protect investors. Many banks are understandably cautious about proceeding until regulation has caught up.
The Basel Committee’s prudential treatment of crypto asset exposures covers risk, liquidity, and capitalisation requirements in detail. The publication of such guidelines is critical as global regulators now have a framework on which to build and provide clarity to banks’ compliance teams on how they can safely operate. The recently-updated version addresses initial concerns about which elements apply to customer-owned custodial assets.
In Europe, the MiCA regulation will soon go through parliament. It provides a comprehensive legal framework for service providers across a range of topics including token issuance, and providing crypto asset services. Banks’ deep expertise in regulatory compliance will benefit them in applying new rules, such as adapting today's MiFid risk questionnaires, which assess customers' knowledge and experience of complex instruments over to blockchain as a condition for allowing crypto trading access.
Regulatory clarity will soon be here, and could in turn open the floodgates for banks and other providers keen to build out offers but currently waiting on the sidelines. Most industry participants welcome the prospect of allowing the industry to move forward.