The Big Banks Positioned to Ride Bitcoin's Bull Run

Traditional banks are now taking the plunge and coming out with crypto-related services. The shift coincides with bitcoin’s price hitting all-time highs in December.

Banks may have been looking closely at digital assets for some time now, but have been skittish about saying anything in public. Now they appear to be joining a general shift towards crypto in the latter half of 2020 that has included payments giant PayPal (PYPL) and hedge fund mavens including Paul Tudor Jones and Stanley Druckenmiller. 

Starting with technologically advanced Switzerland and Singapore, where some of the first big moves are happening, the industry is seeing a growing list of lenders leaning towards crypto.

DBS Bank of Singapore recently announced its crypto trading and custody platform (which is 10%-owned by the national stock exchange SGX) was ready to go live, making it a frontrunner.  

The same week DBS made its announcement, Swiss digital exchange SDX said it was partnering with Japanese bank SBI Holdings, to build a digital asset exchange in Singapore, although that won’t be ready until early 2022, the firms said.  

An important milestone in October was Gazprombank, a subsidiary of the Russian energy conglomerate, going live with crypto custody in Switzerland. The bank used institution-focused custody tech from Swiss firm METACO, which is working closely with core banking software vendor Avaloq. 

It later emerged Spanish bank BBVA will also be basing crypto operations out of Switzerland, and using METACO’s custody tech. BBVA declined to comment on the plans, which sources said would be ready in January 2021.

Another leading bank to emerge from the bushes is London-headquartered Standard Chartered, which announced a crypto custody partnership with U.S.-based Northern Trust. 

CoinDesk also learned that Standard Chartered is working with five or six of the largest trading desks and exchanges in crypto, including LMAX and ErisX, for a post-trade and settlement system which is also slated to go live early next year.

“What you could say is that we’re enabling an element of institutional trading by having an institutional infrastructure,” Alex Manson, head of the bank’s venture arm, told CoinDesk in an interview. “Accordingly, any exchange interested in institutional space is a potential client

In terms of whom the bank is working with, Manson said, “It's hard to be specific about names and exchanges. I would just confirm that we have been in touch with a number of the players and exchanges. Ultimately, all will come together and – assuming the right degree of safety, compliance and regulatory requirements – will become parts of an ecosystem and value chain.”

Providing a sanity check, LMAX CEO David Mercer said the headlines are great for adoption but pointed out that actual banking of crypto is still some way off; a couple of years down the road, he reckoned.

“Mostly the banks are extending existing custodian services. What they’re doing is leveraging their technology prowess,” Mercer said in an interview, adding:

“Entering the crypto space means taking delivery of and owning a crypto asset. Cryptoland is jumping on these technology services and saying, ‘Wow, a huge bank is launching crypto.’ They’re not. They’re just extending their services and future-proofing their business.”

Earlier this year, there was a push from the U.S. Office of the Comptroller of the Currency (OCC) for banks to embrace a more crypto-friendly atmosphere. In July, the agency published a letter telling nationally regulated banks they could offer crypto custody. Earlier this month, Acting Comptroller Brian Brooks hinted at the idea he’d provide clarity around banks plugging “directly into blockchains as payments networks.” 

There’s also evidence that additional guidance from the OCC would help more banks enter the crypto custody space. In August, just under a dozen banks, including U.S. Bank and PNC, indicated they might be interested in providing crypto custody services in response to the OCC’s Advance Notice of Proposed Rulemaking (ANPR) in June, which asked the general public to weigh in on how crypto and other fintech tools might be used in the financial sector.

Cryptocurrency firms also have more banking options in 2020.

Historically, there have been a handful of firms willing to bank the crypto sector, with Silvergate Bank, Signature Bank and Metropolitan Commercial Bank leading the charge. Bankers have long been wary of not being able to trace the source of funds that cryptocurrency firms work with and having to do extra know-your-customer and anti-money laundering checks to onboard crypto businesses.

However, each of these crypto-friendly banks hold just a fraction of the $2.87 trillion in assets controlled by JPMorgan, the largest bank in the U.S. and one of the 10 largest banks in the world.

In May of this year, it was revealed that JPMorgan was banking crypto exchanges Coinbase and Gemini, in part because both firms are regulated by multiple regulators. 

When U.S. regulators get involved, large U.S. banks feel more comfortable offering services to an industry. Digital securities firm TokenSoft has been banked by JPMorgan since 2017, in part because of its regulatory sophistication, said TokenSoft CEO Mason Borda. 

“I was able to walk across the street into the branch, accurately and effectively describe our business and additionally recommend that the banker personally invest in bitcoin,” Borda said. The banker “politely brushed off” Borda’s bitcoin advice but gave TokenSoft a bank account, he said.

Custody and checking accounts are still financial services with tight margins and the crypto industry is a new asset niche on which banks still have to figure out how to make risk-adjusted returns. 

While banks aren’t driving bitcoin’s current bull run, their increasing familiarity with the sector has been seen by many as an endorsement of a legitimate asset class.