Banks have a growing cryptocurrency problem. Internal trading desks and a broadening array of clients are pressuring senior management at large banks to launch services around cryptocurrencies.
Compliance departments and boards are less enthusiastic but there is a rising feeling that something must be done to avoid being left behind. It’s just not clear what and how.
The rise of companies built around bitcoin and other digital assets is threatening to make dealers look a bit like Wall Street executives aching to look cool at a hackathon: uncomfortable, filled with fear of missing out and struggling for relevance.
And aside from the potential hazards of crypto somehow dragging their good name through the mud at some point, banks also face a raft of very real challenges in their efforts to go digital: their technology is not up to it; they can’t move fast; they need to comply with regulations that are currently unclear or not yet in place. Talent is growing more and more difficult to find and keep. And what if it all turns out to be a big scam?
Despite the potential challenges, large banks can no longer shrug off digital coins, a market which has grown to $1.8tn in size.
“The digital asset universe is too large to ignore. We believe crypto-based digital assets could form an entirely new asset class,” said Bank of America in its first ever research note dedicated to crypto.
Several large US banks have made announcements about their involvement or planned ventures into digital markets, while many European dealers are quietly following suit.
Some, like Goldman Sachs, have chosen to make a splash with their efforts around crypto, deliberately creating a lot of noise about its baby steps. European banks are more tortured and, as a result, messaging is mixed.
In February, the research team of German lender Commerzbank sent out a note that explained why its analysts do not cover bitcoin, noting the bank “does not consider it to be its responsibility to comment on the price development of purely speculative investments or to predict it”. By September, the lender had established a digital asset team.
Deciding where the behemoths of traditional finance will fit into the cryptocurrency world is tricky. Custody, the highly technology-driven and complex process of storing digital assets, is risky and very difficult to insure.
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Trading is equally dubious because right now banks can only buy and sell futures and other non-cash contracts, which makes it difficult to generate the sort of returns that trading companies native to crypto can. Lending is off limits for now. And companies that have been active in digital asset markets are far from scared.
“Crypto is expanding into . . . the traditional financial services market,” said David Kinitsky, chief executive of Kraken Bank. “Businesses [native to crypto] will win out over incumbents in this new medium, just as we’ve seen in other industries when the internet was introduced.”
Part of the problem is that everything to do with crypto involves cutting-edge technology — far from the sort of kit that the stalwarts of traditional finance are normally associated with. After years of consolidation and mergers, the technology that underlies banking giants is creaky, fragmented and often arcane.
“Banks are not really tech-forward companies. They just don’t have the digital infrastructure,” said Diogo Monica, co-founder of Anchorage Digital, a bank and cryptocurrency technology provider.
Talent is also an issue because banks are simply not as cool as they used to be. Recruiters say that investment banks are being forced to seek out retired coders to run arcane and tangled computer systems because young people no longer learn the “languages” required to operate some of the largest institutions on Wall Street.
“Banks definitely have a problem,” a specialist financial markets recruiter said, noting that young coders enjoy better pay and more flexibility at crypto or technology-focused companies. And in many cases the work is simply more interesting.
Not all is lost, however. Reputation and the significant client base they already have will be valuable, especially if more conservative investors such as insurance companies get involved. Lending and borrowing could also open up in the future.
“There will be a lot of counterparts who will feel more comfortable dealing with Goldman Sachs than a crypto native firm,” said Christine Trent Parker, a partner in the Financial Industry Group at law firm Reed Smith. And if their tech is not up to it, the banks can always buy it in.
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