A recent regulatory overhaul by the US government to allow banks to deal with crypto has further accelerated the trend.
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Investment products rapidly launching among institutional interest
US banks are divided into commercial banks and investment banks. Especially the latter have been actively working to bring cryptocurrency into the world of traditional financial investment products.
The reason lies in the role of investment banks. Investment banks are financial institutions specialized in wholesale finance, mainly connecting large-scale investors with companies in need of funds. With the rising Bitcoin price and attention from institutional investors on cryptocurrencies as a hedge against inflation, investment banks, whose main customers are institutional investors, quickly adapted to this demand. One after another, they are entering the cryptocurrency fund and investment brokerage market.
Through its private banking service, JP Morgan – which ranks first among US banks with $3 trillion in assets under management – launched a Bitcoin Passive Fund in August for institutional customers and ultra-high net worth individuals. Based on cryptocurrency market data provided by New York Digital Investment Group (NYDIG), the passive fund produces a return equal to the increase rate of the Bitcoin index.
Since last May, Goldman Sachs, another storied investment bank, has also been providing non-deliverable forward (NDF) futures trading, a derivative product linked to the price of Bitcoin.
The high interest in cryptocurrencies by institutional investors is highlighted by statements from JP Morgan Chairman Jamie Dimon. Despite criticizing Bitcoin as having “no value,” Dimon stated that “we provide services because of customer demand”.
The growing financial infrastructure market for crypto
Commercial banks in the United States mainly handle short-term funds, general deposits and loans. This makes these banks closely connected with ordinary people. They are exploring new revenue models in the cryptocurrency infrastructure market.
Financial Market Infrastructure (FMI) refers to a set of infrastructure that supports financial transactions such as clearing and settlement in the financial market. Considering that the cryptocurrency financial market is still in its infancy, US banks are starting with the custody stage as the first building block to safely store assets.
In early October, US Bancorp – one of the top 10 US financial institutions by assets under management – launched a cryptocurrency custody service for institutional investors in the US and the Cayman Islands. Bank of New York Mellon (BNY Melon), the oldest bank in the United States, also got a head start by managing Grayscale’s Bitcoin Trust (GBTC).
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Bank of America (BoA), the second largest bank in terms of assets under management, also recently announced the expansion of its digital asset research team in a publication entitled “Digital Assets Primer: Only the first inning”. In July, Bank of America’s main brokerage department started settlement and clearing operations for cryptocurrency exchange-traded products (ETPs) targeting hedge funds in Europe.
Not to be left out, Citi is also considering entering the crypto market, starting with custody. As Citibank’s Global Head of Foreign Exchange Itay Tuchman stated in a Financial Times interview last May: “Citi is considering launching a cryptocurrency trading and custody service”. In October, he reiterated the possibility of Citi entering the market, stating: “Despite all their banter about crypto, it’s notable that no bank has its own [crypto] custodian—yet. Even though this is what their clients ask for.”
US government and banks supporting virtual assets – A boon to business?
To keep up with these moves by US banks, the Federal Deposit Insurance Corporation (FDIC) is preparing guidelines for custody and cryptocurrency collateral which would enable banks to conduct cryptocurrency business. The FDIC is a regulatory authority that regulates bank deposits and provides deposit insurance to customers of commercial and savings banks in the United States.
The regulations announced by the FDIC are being prepared by a sprint team launched in May. Composed of the FDIC, the Federal Reserve Board (FRB), and the Office of the Comptroller of Currency (OCC), the team is charged with developing digital asset business regulations and dividing responsibilities between regulatory bodies. Among them, the OCC is also an institution that has implemented a pro-virtual asset policy in July 2020 by allowing virtual asset custody services to commercial and savings banks under the leadership of former Acting Comptroller Brian Brooks, who had previously worked as Coinbase’s Chief Legal Officer.
The FDIC is currently preparing specific guidelines, such as what steps US banks and stablecoin issuers must follow when providing virtual asset custody services or when using them as collateral for loans. Authorities are also considering listing virtual assets on the balance sheet just like traditional assets.
FDIC chair Jelena McWilliams explained in a Reuters interview that a team of US bank regulators is working on a roadmap for banks to engage with crypto assets. Summarizing the agencies stance, she said: “I think that we need to allow banks in this space, while appropriately managing and mitigating risk”. “If we don’t bring this activity inside the banks, it is going to develop outside of the banks”, she continued. “The federal regulators won’t be able to regulate it”.
If regulatory uncertainty is resolved in the future, it is expected that traditional American financial institutions, which have held a conservative view on virtual assets, will enter the cryptocurrency market more actively as part of their revenue diversification.
As Citi’s Itay Tuchman put it: “We’re not Tesla. We’re not in the business of inventing things that customers will want in the future. […] There is a lot of demand for cryptocurrency and to capture it, banks stand for safety and soundness”.