Banks test cryptocurrencies offerings amid regulatory scrutiny

Regulators fear that risks to financial stability could be significant if banks expand their offerings in volatile market

FILE - In this June 1, 2021, file photo, a woman walks past an advertisement for the Bitcoin cryptocurrency in Hong Kong. China’s biggest banks promised Monday, June 21, 2021, to refuse to help customers trade Bitcoin and other cryptocurrencies after the central bank said executives were told to step up enforcement of a government ban. (AP Photo/Vincent Yu, File)
Powered by automated translation

Banks looking to expand into the wild world of crypto are getting a pointed reminder from regulators of the risks involved.

The Basel Committee on Banking Supervision said on June 10 that it is planning to assign Bitcoin, among other crypto products, the toughest capital requirements for any bank that 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 latest sign that China plans to do whatever it takes to close any loopholes left in crypto trading.

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

This year has seen more and more lenders examining how they might broaden their offerings even as caution remains the watchword, according to a Bloomberg analysis of the offerings from some of the world’s biggest banks. While several now clear crypto futures, most have largely avoided other services.

Here is what some banks are doing – or not doing – so far:

Goldman’s chief executive David Solomon said in Congressional testimony earlier this month that the bank 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 provide advice to clients, particularly institutions, and high net worth individuals that have an interest in gaining exposure, although often they go to other places to gain those exposures.”

Linking up with other providers may 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 nearly $65,000 in mid-April. Prices collapsed in May, falling back to the mid-$30,000s, on the back of tougher regulatory scrutiny in China and Elon Musk’s criticism of Bitcoin’s high energy cost.

The banks have 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 accomplish blockchain-based tasks that are impossible with Bitcoin.

In one example, JPMorgan is using its private version of Ethereum to conduct overnight repurchase agreements where digitised US Treasury bonds are swapped for JPM Coin, the bank’s version of a digital 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 exposure to 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 importance of caution.

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