WASHINGTON (Reuters Breakingviews) – Banks are gearing up to jump into the crypto craze in 2022. It grabs them with a bevy of issues that differ from their core business, from murky regulation to a functioning market 24/7. Struggles for profit and customers can mask other risks as well.
The value of digital currencies in circulation has tripled to over $ 2 trillion since the start of 2020. Traditional US banks currently cannot trade such assets themselves, but their customers and many bankers do. wish, despite the skepticism of such luminaries as the boss of JPMorgan, Jamie Dimon. who dismissed bitcoin as “worthless” as recently as October. Dimon Bank, Goldman Sachs, Morgan Stanley and others are helping wealth management clients gain exposure through crypto derivatives. These trade on regulated exchanges, a step away from the underlying digital coins. But it’s little more than splashing around.
What would really open the floodgates for the biggest banks would be the sign of regulatory approval to get directly involved in the custody and trading of digital assets. Among other things, this would help prevent lucrative hedge fund clients from going elsewhere for their crypto needs.
But banks, constrained by regulation, cannot predict where the watchdogs will end up. While the Federal Deposit Insurance Corp has expressed openness to increased exposure to crypto, the Office of the Comptroller of the Currency has appeared skeptical and the Securities and Exchange Commission has essentially promised a crackdown if it finds itself in charge of crypto.
Take for example bitcoin backed loans, an area explored by several companies, including Goldman. Banks need to know if regulators will allow such products. Bankers also need to figure out how to structure them if they cannot directly hold collateral.
Always open crypto markets add another dimension. Banks are used to fixed trading hours for stocks, for example. Many securities transactions take time, sometimes days, to settle, while digital currencies work in seconds. Moreover, the whole problem is that the transactions cannot be settled even if there are errors. Such features increase the importance of third-party digital custodians in helping manage risk, and many of these entities are, as yet, neither regulated nor transparent.
These are known unknowns. An even greater danger could be unknown strangers. These range from the reliability of decentralized confirmation processes attached to cryptocurrencies to the risk of hacking or errors that cannot be corrected. Wall Street’s fear of missing out should not obscure the risks of entering.
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(Edited by Richard Beales and Amanda Gomez)
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