The huge FOMO trend emanating from crypto circles will make 2022 a difficult year for Asian banks.
Many institutions are making the leap, whether it’s because they fear missing out on the opportunity or make business-smart decisions. This is especially true in Southeast Asia where DBS has established a crypto Digital Exchange Platform.
Siam Commercial Bank has a 51% share of cryptocurrency trader BitKub in Thailand. Union Bank of the Philippines has plans to offer crypto trading as well as custodial services. So on and so forth.
Fitch Ratings and Goldman Sachs, investment giants, are both worried by all this. It’s not a good idea to wave the red “danger” flag, as the money’s trajectory is moving away from old-school payment methods like coins and notes. It’s more of a be-careful-what-you-wish-for vibe.
Fitch analyst Tamma Februaryrian notes that the upside to getting on board with crypto could be increased trading and custodial costs over time. As science fiction turns into financial reality, banks could gain competitive advantages and build new customer bases in the nascent field of service. It is not likely that the competition threats posed in wholesale clearing, settlement, and cross-border payment by fintech startups and crypto technologies will diminish.
There are risks as regulatory responses and crypto disruptions move faster than executive offices can adapt. Moreover, market infrastructure and safeguards may not be moving fast enough.
Febrian states that changes could increase compliance costs, or reduce existing/planned business activities, while tighter regulation helps contain financial and operational risks, giving potential cryptocurrency investors greater assurance. There may be greater risk for crypto engagement in areas where banks have less stringent risk controls. This could include money laundering or terrorism financing.
Febrian says that reputational risks can also stem from legal activity, such as if customers believe banks have implicitly supported crypto trades that go sour.
Another thing to think about is the widespread belief that increasing adoption of cryptocurrency will lead to rising prices. According to Goldman strategists Zach Pandl, Isabella Rosenberg, mainstream adoption of crypto assets can be a double-edged weapon. It can increase valuations but it will also likely increase correlations with other financial markets variables, decreasing the diversification benefit of the asset class.
This warning is contrary to the common wisdom that cryptocurrencies can be used for diversification. It’s worse than Jamie Dimon CEO of JP Morgan Chase calling cryptocurrency a ‘fraud and ‘worthless’. Warren Buffett called Bitcoin a “mirage” that doesn’t pass the currency test.
It has been easy for crypto people to dismiss such naysaying like the protestations made by analog-age thinkers. Goldman’s criticism makes mockery of crypto bulls who tee off any happening in El Salvador which made Bitcoin legal tender. Or whether Microsoft, Paypal, or Starbucks will accept it.
Other important changes are happening at the top monetary authorities around the world, from the People’s Bank of China (Beijing) to the Federal Reserve (Washington). The PBOC is the leader in introducing a digital currency for central banks, which the crypto-crazed crowd calls CBDC’s. Fed Chairman Jerome Powell is also moving in this direction.
Powell’s team had announced ten days ago that it is seriously considering a digital currency, or a Fedcoin. Markets were realizing that the long-held belief that crypto was a hedge against inflation was false, and the news came at the exact same time as the announcement.
The debate is raging over whether an Fedcoin or an e-yuan would be able to fortify or ban private crypto assets. China’s President Xi Jinping has effectively banned crypto mining and trading.
What about the Fed? Powell’s team is being cryptic about their intentions. Bitcoin enthusiasts know that the team of the Securities and Exchange Commission Chairman Gary Gensler could soon decide the future for crypto assets.
It’s difficult not to see the connection between what North Korea is doing and this. The biggest concern about crypto is its ability to make life easier for terrorist financiers, money launderers and tax evaders. Chainalysis, an advisory firm, stunned everyone when it revealed that Kim Jong Un’s hacker Army accumulated $400 million in cryptocurrency last year. This is a 40% increase over 2020.
The real number is likely to be much greater. It allows Kim to finance his nuclear ambitions and to slap the United Nations sanctions. Gensler’s phone must be ringing with panicked calls from the Treasury Department and top national security officials.
Goldman’s doubts about the normal supply and demand dynamics of cryptocurrencies should serve as a warning to Asia banks. The predictability that they usually apply to assets or services may also be lost.
Analyst Febrian says that, as of right now, “we believe recent crypto activity will not have major near-term ratings repercussions on Fitch-rated banks from Southeast Asia,” but continues to monitor developments as they occur.
However, we are still learning a lot about compliance to reduce risks and regulatory controls. This includes know-your-customer procedures. Credit rating agencies’ ability to assess a bank’s digital assets risks is also uncertain. New ones will emerge as innovation accelerates.
This is why Asia banks need to be very cautious about Goldman’s concern that crypto assets may not follow the same laws of financial gravity as other stores value.