Banks are preparing to jump into the cryptocurrency craze in 2022. This will lead them to grapple with a host of problems that stray from their core business, from murky regulations to a market that operates 24 hours a day, seven days. a week. The fight for profits and customers can hide other risks as well.
The value of digital currencies in circulation has tripled to over $ 2 trillion since the beginning of 2020. Traditional banks in the United States are currently unable to trade these types of assets, but their clients do, and many bankers want to get in. , despite skepticism from luminaries like JPMorgan boss Jamie Dimon, who was still shipping bitcoin as “worthless” in October. Dimon’s bank, Goldman Sachs, Morgan Stanley and others are helping wealth management clients gain exposure through crypto derivatives. These are traded on regulated exchanges, one step away from the underlying digital currencies. But it is little more than mere dabbling.
What would really open the floodgates for major banks would be the go-ahead from regulators to get directly involved in the custody and trading of digital assets. Among other things, that would help prevent lucrative hedge fund clients from going elsewhere to meet their crypto needs. But banks, constrained by regulations, cannot predict how far the watchdogs will go. While the Federal Deposit Insurance Corporation has been open to more exposure to cryptocurrencies, the Office of the Comptroller of the Currency has been skeptical and the SEC has basically promised to take drastic measures if it ends up taking over cryptocurrencies.
For example, let’s think about adding bitcoin-backed loans, an area that is being explored by several companies, including Goldman Sachs. Banks need to know if regulators will allow these products. Bankers also have to figure out how to structure them if they can’t own the collateral directly.
Cryptocurrency markets, always open, add another dimension. Banks are used to fixed trading hours in equities, for example. Many securities transactions take time, sometimes days, to settle, whereas with digital currencies it takes seconds. Also, the key is that operations cannot be undone, even if there are errors. These characteristics increase the importance of third-party digital custodians to help manage risk, and many of those entities are not yet regulated or transparent.
All of these are known unknowns. An even greater danger would be the unknowns that we do not know. These range from the reliability of the decentralized confirmation processes associated with cryptocurrencies to the risk of hacks or errors that cannot be corrected. Wall Street’s fear of being left out shouldn’t hide the risks of sticking your head in.