Banks should only explore entering the crypto market after properly understanding the industry’s risks and undertaking necessary due diligence, according to a presentation from Wipfli LLP Principal Marcie Bomberg-Montoya and NYDIG Relationships Manager Tammy Bangs during the Spring Seminar of the Bank Holding Company Association.
Montoya said banks currently looking to enter the crypto world should not consider locking in their own server wallet or implementing non-fungible tokens. She stressed the importance of banks undertaking proper risk assessments, preparing a business case, and keeping the FDIC abreast of any developments before unveiling any crypto program.
Crypto is rapidly growing into a major player in finance. The market capitalization of all cryptocurrencies reached a record $2.6 trillion last year. In January 2021, Anchorage Digital Bank became the first federally-chartered digital-asset bank. As reported by CNBC, JPMorgan Chase, Morgan Stanley and Goldman Sachs have dedicated groups for cryptocurrency and its underlying blockchain technology. JPMorgan has more than 200 employees working in its Onyx division. The JPM Coin digital currency is already being used commercially to send payments across the globe, CNBC reported.
Nearly 37 percent of banks in a recent survey said they are likely to offer a crypto-related service over the next 12-18 months, Montoya noted. Fifty-four percent say they are not. Nearly all central banks are exploring central bank digital currencies. Bangs expects bitcoin will eventually be used as loan collateral at many traditional banks. Until then, she said banks can leverage their interest income and make money on non-interest income from transaction fees.
To Bangs, bitcoin is the most-settled digital currency technology because it has been classified as an asset. She expects the SEC will likely deem more than 90 percent of cryptocurrencies other than bitcoin to be declared as securities, which will lead to a substantial regulatory framework.
Bangs said the banks that have shown the most success in the crypto market have focused on educating their boards, teams and clients that the market is not insured by the FDIC. Though bitcoin is historically seen as being used by bad actors, Montoya said regulatory agencies have caught up in making the industry safer. Regulatory uncertainty still remains, however.
The rapid growth of the industry, along with the lack of customer protections, led the Financial Stability Board earlier this year to deem the market as possibly threatening global financial security. In one day, a massive sell-off recently erased more than $200 billion from the crypto market. The federal government is discussing whether to create a regulatory agency or only issue individual regulations to ease the current volatility in the crypto-asset space.