Reports that legacy banks like BNY Mellon and Deutsche Bank are becoming active in the cryptocurrency space, including through custody services, should appear as welcome news to crypto investors.
After all, lost or misplaced private keys are a bane of the crypto world – just remember the Welshman who today lost 7,500 bitcoin (BTC) worth about $ 400 million when he dumped his PC’s hard drive and forgot that this was the only repository of his private key. Meanwhile, traditional banks are the ultimate stewards of society, so they may at least be able to improve the crypto user experience in terms of private keys.
But if large financial institutions actually deal with cryptocurrencies – and not just in the custody area, as the investment bank Morgan Stanley signaled a future investment in Bitcoin on February 13 – why now? Is it just the rising price of bitcoin? Or has the evolving blockchain / cryptocurrency industry reached a new level where it is acceptable even to habitually cautious custodians?
It seems like a confluence of factors. In the summer of 2020, the United States Office for the Currency Auditor issued a letter of interpretation in which banks could secure their customers’ digital assets, “including the possession of unique cryptographic keys related to cryptocurrency.” This resulted in “a dramatic increase in demand and direct inquiries from banks,” Pete Najarian, chief revenue officer at BitGo – a cryptocurrency administrator – told Cointelegraph.
Meanwhile, the recent surge in crypto markets has attracted more traditional large investors who expect institutional security for their digital assets. “There is a real demand from end users and this is absolutely driving the existing infrastructure towards participating in these markets,” added Najarian.
There are three main reasons for banks’ current interest, said Nigel Green, founder and CEO of deVere Group, an independent financial advisory organization. He told Cointelegraph, “The first is to meet demand from their institutional clients. The second is that it is becoming increasingly clear that cryptocurrencies are the future of money. and third is the fear of missing out or being left behind. ”
Tobias Tenner, deputy director and head of digitization at the Association of German Banks, told Cointelegraph that the skyrocketing price of Bitcoin had piqued the interest of German banks, as did a new regulatory framework that was introduced in January 2020 and paved the way for banks to act as such crypto custodians. “Banks could [soon] provide custody, trafficking, and likely advisory services, ”he said.
Are banks up to the task?
But are traditional banks really ready for cryptoverse? Can they handle the volatility, the hackers, and the evolving technology? Pablo Agnese, a lecturer in the Department of Economics and Business Organization at UIC Barcelona, told Cointelegraph: “I think they are [the banks] learn and try to find their role in this “brave new world”. However, history shows that the traditional banking sector is not exactly prone to major technological breakthroughs. ”
Bryan Routledge, associate professor of finance at Carnegie Mellon University, told Cointelegraph that crypto custody is not much different from what old banks have been doing now and for years. Storing a public and private key pair is important, “but it’s not that difficult,” or shouldn’t be for most banks.
Older institutions would also jeopardize their corporate reputations when entering the crypto arena, which could bring comfort to new users who might otherwise be careful about dipping a toe in the crypto water. Can banks handle the challenge? “Absolutely,” Perianne Boring, Founder and President of the Chamber of Digital Commerce, told Cointelegraph, adding:
“As more and more companies and institutions include cryptocurrencies on their balance sheets, the demand for highly secure custody services is increasing. Large-scale owners need robust institutional crypto asset custody solutions with multi-authentication and traditional banks are well positioned to provide them. “
Will banks “white label” their services?
If so, could this come at the expense of crypto-focused companies like BitGo or crypto exchanges like Gemini, which also offer custody services? “We believe there is room for both traditional financial services companies and crypto-native companies,” replied BitGo’s Najarian, who sees new opportunities to work with traditional banks.
Large institutions recognize that crypto custody is a “complex and highly specialized” endeavor that “revolves around securing a private cryptographic key required to sign transactions,” and many will choose to use specialist firms like BitGo as their Engaging sub-custodians while they do the custody service in the bank brand, a process sometimes referred to as “white labeling”.
What about the timeframe – could legacy banks, or at least some of them, become major players in cryptocurrency custody, trading and / or asset management in the next year or two? “Yes,” says Boring:
“The market for custody services is just getting too big for global banks to ignore. We see already [Singapore’s] DBS and [the United Kingdom’s] Standard Chartered has introduced custody solutions for digital assets and we expect more banks to respond to the growing demand for custody from their clients who add digital assets to their balance sheets and portfolios. “
“I think it is almost inevitable that global banks will become major players in the crypto ecosystem as digital currencies become increasingly dominant in the broader global financial system,” Green said. “In an increasingly digitized, technology-driven world, large banks will have no choice but to support digital, limitless currencies. You have to adapt to survive. “
Tenner told Cointelegraph that global banks could be a major player in the business, provided they accept euro-denominated crypto tokens – i.e. a “programmable euro” – according to the Association of German Banks position paper for 2020, although “it’s premature to see it.” predict how much banks could play a role. “Currently, the crypto-asset business is a niche product in the eyes of bankers, added Tenner.
Risk or chance?
It is clear that not all banks are willing to charge fees. When asked in a 2020 survey by the Royal United Services Institute and Association of Certified Anti-Money Laundering Specialists whether they viewed cryptocurrency use as a risk or an opportunity, only 19% of financial institutions said crypto was Chance to look at.
In comparison, more than three quarters (80%) of respondents in the cryptocurrency industry saw crypto as an opportunity. When asked about specific cryptocurrency risks, financial institutions identified money laundering as the most vulnerable risk (cited by 88% of respondents), closely followed by “use of cryptocurrency on the dark internet” (87%) and “use of cryptocurrency” for them Procuring illegal goods and services outside the formal financial system ”(87%).
For one thing, Najarian thinks these concerns about crime and illegal goods are a bit exaggerated. “We don’t believe that holding crypto poses a higher criminal risk compared to other assets. Statistics have shown that the volume of illegal or suspicious activity related to crypto is much lower than that of traditional finance. “
Regarding the study, Kayla Izenman, research analyst at the Royal United Services Institute, told Cointelegraph, “It is worth remembering that financial institutions are likely to see crypto as a compliance risk, but they will also see opportunities in an investment perspective.”
She added that the survey also asked financial institutions about current and future crypto use cases, and “investing was rated as the most important use case in both responses, but indicated that daily payments would be more common than illegal purposes in the future. Maybe the future is closer than we thought. “
When asked if traditional banks really understand the criminal risks of holding crypto, Izenman replied, “They are likely to be much more cautious about the beginning of their crypto journey than they were originally virtual asset service providers.” Banks are aware of the potential pitfalls: “The reason it took so long to get here is because they know what they are getting into and are concerned about it.”
In the meantime, some of the world’s best-known legacy banks still seem to be on the fence. JPMorgan Chase, for example, will “eventually” get into Bitcoin, Co-President Daniel Pinto said recently, adding that current customer crypto demand “is not there yet”.
“Banks have to recycle themselves”
Agnese told Cointelegraph: “I keep thinking that banks and cryptos are NOT compatible, as the latter imply a full decentralization of the ‘banking’ and traditional banking is anything but decentralized.” In addition, traditional banking is a historically protected sector that has always struggled to maintain its privileges. “Sooner or later the banks have to recycle themselves and offer something valuable. Crypto custody might just as well be the alternative “because it is how banks used to do it with gold and other assets.
Routledge said it’s not really surprising that some big banks are starting to put sizeable money into the crypto space. The mere fact that Bitcoin, the first cryptocurrency, is worth “more than zero” after 12 years – that is, has survived – is a “remarkable” development. It shows that decentralized funding is working and banks now want to be a part of it, he told Cointelegraph.
In summary: “We are now at a critical turning point,” Boring informed Cointelegraph. “More and more diversified financial services offerings are being introduced by digital asset companies, including crypto retirement plans, lending services, high interest savings plans, and custody services. ”She went on to say:
“As the underlying technology itself becomes more robust, we see 2021 as an explosive year for the expansion and adoption of the services that have resulted from technology investments.”
