Banks test cryptocurrencies offerings amid regulatory scrutiny

22 June, 2021
Banks test cryptocurrencies offerings amid regulatory scrutiny
Banks seeking to expand in to the wild world of crypto are receiving a pointed reminder from regulators of the risks involved.

The Basel Committee on Banking Supervision said on June 10 that it's likely to assign Bitcoin, among other crypto products, the toughest capital requirements for just about any bank that really wants to hold it. The standard setter said that the risks to financial stability would be significant if banks expand their offerings in the volatile market.

On Monday, Bitcoin declined about 10 per cent to a two-week low after China announced that it summoned officials from its biggest banks to reiterate a ban on providing cryptocurrency services. It’s the most recent sign that China plans to do whatever needs doing to close any loopholes left in crypto trading.

The warnings come as clients show increased interest in the assets, leaving organizations such as JPMorgan Chase, Goldman Sachs and Morgan Stanley to wrestle with how better to offer contact with the burgeoning, but volatile, asset class.

This season has seen an increasing number of lenders examining how they could broaden their offerings even as caution remains the watchword, according to a Bloomberg analysis of the offerings from a few of the world’s biggest banks. While several now clear crypto futures, most have largely avoided other services.

This is what some banks are doing - or not doing - up to now:

Goldman’s leader David Solomon said in Congressional testimony earlier this month that the lender is restricted by regulations from acting as a principal trader in cryptocurrencies or from owning most coins.

“We do clear Bitcoin futures,” he said. “We offer advice to clients, particularly institutions, and high net worth individuals that have a pastime in gaining exposure, although often they go to other places to get those exposures.”

Linking up with other providers could become the norm. JPMorgan’s crypto strategy depends on following customer demand, according to Daniel Pinto, who heads the lender’s corporate and investment bank. That may mean partnering with an exchange like Coinbase Global for sub-custody if institutional clients want that, Mr Pinto said in April during an interview.

Such exposure isn’t for the faint-hearted. Bitcoin jumped from about $10,000 last September to practically $65,000 in mid-April. Prices collapsed in May, falling back again to the mid-$30,000s, on the trunk of tougher regulatory scrutiny in China and Elon Musk’s criticism of Bitcoin’s high energy cost.

The banks have already been quicker to embrace the underlying technology that underpins such digital assets. JPMorgan has been a longtime proponent of Ethereum, the world’s most-used blockchain that uses smart contracts to perform blockchain-based tasks that are impossible with Bitcoin.

In a single example, JPMorgan is which consists of private version of Ethereum to conduct overnight repurchase agreements where digitised US Treasury bonds are swapped for JPM Coin, the bank’s version of an electronic dollar. It says it’s doing more than $1 billion of such trades a day.

There’s still no consensus on the best way to offer contact with cryptocurrency assets themselves. JPMorgan’s Jamie Dimon said at this month’s congressional hearing that his bank doesn’t tell its customers what to do with their money, but he emphasised the value of caution.

“We want to arrange it in a way we think it’s safe and proper for them,” he said. “We’re still focusing on that.”
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