Banks' Bitcoin Interest: Exploring Institutional Investments

Bitcoin's latest dizzying ascent and increased adoption among investors, corporations, and fintech competitors have sparked fears among banks of being left behind. Banks and asset managers are increasing their exposure to cryptocurrencies, with some banks setting up digital asset units and others criticising Bitcoin for its volatility and environmental impact. While some banks remain hesitant, others have begun to indirectly or directly invest in Bitcoin and offer crypto-related services to their clients.

Banks' concerns about Bitcoin

Banks have expressed concerns about Bitcoin, and these concerns vary. Firstly, banks are wary of Bitcoin's decentralized nature, which undermines the authority of central banks and could potentially make them obsolete. Bitcoin's peer-to-peer transactions do not require a regulated intermediary, and this lack of regulation and pseudonymity make it difficult to implement anti-money laundering (AML) and know your customer (KYC) protocols. This makes it easier for criminals to use Bitcoin for nefarious activities, and for illegal transactions to take place.

Another concern is Bitcoin's volatility. The price of Bitcoin has been generally unstable over its short life, and banks are concerned that it might not remain a stable investment vehicle over time. This volatility also scares the average investor, according to some experts.

Additionally, Bitcoin's environmental impact has been a cause for concern. The energy-intensive process of mining new coins has led to criticism from banks and other institutions.

Lastly, some banks are hesitant to adopt cryptocurrencies because they believe their inherent risks outweigh their potential benefits. They perceive the transactions involving these assets as presenting heightened risk and requiring lengthy and expensive due diligence.

Banks' positive views on Bitcoin

Banks and other financial institutions are increasingly adopting Bitcoin and other cryptocurrencies. While there is little consensus among big investment banks about Bitcoin's value, some banks have expressed positive views about it.

Citigroup, for example, has taken a broadly positive stance on Bitcoin. In a report published in March 2021, the bank claimed that Bitcoin is "at the tipping point" for mainstream adoption. The report also stated that Bitcoin “may be optimally positioned to become the preferred currency for global trade”.

Another example is Morgan Stanley, which in January 2021, bought 10% of MicroStrategy, a company whose CEO, Michael Saylor, is one of the most prominent advocates for Bitcoin. The bank also announced plans to offer its wealthier customers access to Bitcoin funds.

In February 2021, Bank of New York Mellon, America's oldest bank, announced plans to store and manage Bitcoin and other digital assets for its clients. This move was seen as a "tipping point" in the market by Guy Hirsch, US Managing Director at eToro.

JP Morgan, the largest US bank by assets, has also softened its stance on Bitcoin. In 2017, JP Morgan CEO Jamie Dimon called Bitcoin a "fraud", but the bank has since changed its tune. In 2020, JP Morgan analysts wrote that Bitcoin's price has "considerable" upside in the long term as it competes with gold as an "alternative currency". The analysts added that the "potential long-term upside for Bitcoin is considerable".

Banks' negative views on Bitcoin

Banks have expressed several concerns about Bitcoin, which has led to a negative view of the cryptocurrency. Firstly, banks are afraid of losing control to Bitcoin. Traditional banking services value the control they exert over people and their money and will go to great lengths to maintain this control. Bitcoin, on the other hand, returns control and power to the owners of the money.

Secondly, banks are concerned about the environmental impact of Bitcoin. The process of mining new coins is energy-intensive, with Bitcoin's annual energy consumption rivaling that of the Netherlands. The entire Bitcoin system generates as much e-waste as the entire Netherlands.

Thirdly, banks argue that Bitcoin is a highly speculative asset and a terrible store of value. Bitcoin does not generate cash flow or dividends, cannot be used productively, and does not provide social benefits. Therefore, its market valuation is based purely on speculation.

Additionally, banks have also criticized Bitcoin for its potential use in illicit activities, such as money laundering and ransomware attacks. The decentralized nature of Bitcoin makes it difficult for banks and regulatory authorities to influence or control it.

Lastly, banks are concerned about the potential disruption Bitcoin could bring to the traditional monetary system. As a peer-to-peer network for creating and exchanging value, Bitcoin may render banks useless. Banks have resorted to spreading misinformation, discouraging public adoption, and encouraging stricter regulation to protect their position.

Banks' indirect exposure to Bitcoin

Banks are increasingly exposed to cryptocurrencies, including Bitcoin. While some banks have chosen to invest in Bitcoin, others have criticised it for its volatility and environmental impact. However, as the broader public becomes more interested in crypto-assets, banks are under pressure to assess how this activity may impact their operations and prepare for the risks associated with these new assets.

Banks can be exposed to crypto-assets in several ways, even if they do not offer crypto products and services. For example, banks may process fiat currency transactions on behalf of virtual asset service providers (VASPs), such as exchanges, Bitcoin ATMs, and other platforms. In some cases, banks may knowingly maintain relationships with VASPs and can apply risk management controls to monitor those accounts. However, banks may also have exposure to VASPs that is less obvious, as transactions for VASPs and their customers may not appear to have any connection to digital assets on the surface. Without sufficient controls in place, banks could face significant exposure to crypto-asset-related risks.

Additionally, banks can face indirect exposure through their correspondent relationships. When a bank facilitates currency clearing or provides services on behalf of counterparty financial institutions, it may be exposed to risks if those institutions maintain relationships with VASPs or other crypto businesses. Therefore, it is crucial for banks to have access to due diligence information on VASPs and integrate it into their AML screening and monitoring procedures to identify these risks effectively.

Furthermore, banks may unknowingly be exposed to crypto-assets through their retail and business customers. For instance, retail customers may request wire transfers to a crypto-asset exchange from their bank account, use their credit or debit cards to purchase crypto-assets, or operate an unlicensed peer-to-peer crypto-asset exchange using their bank account. Similarly, merchant customers may offer payment options in crypto-assets, and their customers may pay with illicit tokens. Banks should also consider the possibility of customers depositing cash withdrawn from a crypto-asset kiosk, such as a Bitcoin ATM, into their accounts.

Overall, while banks may have indirect exposure to Bitcoin and other crypto-assets, it is essential for them to conduct thorough risk assessments and implement appropriate controls to mitigate the associated risks effectively.

Banks' direct exposure to Bitcoin

Banks are increasing their direct exposure to Bitcoin and other cryptocurrencies. This is partly due to the fear of being left behind as the value of Bitcoin continues to increase, and more investors, corporations, and fintech competitors adopt it.

Some banks have set up digital asset units, while others have criticised Bitcoin for its volatility and negative environmental impact. However, the former view seems to be winning out, as banks seek to provide services to clients who want to invest in Bitcoin.

One of the first big banks to get involved with cryptocurrencies was Citigroup. In 2018, it found a way to invest in cryptocurrencies without actually owning them. In 2021, it published a report claiming that Bitcoin is “at the tipping point” for mainstream adoption.

In February 2021, America's oldest bank, Bank of New York Mellon, announced plans to store and manage Bitcoin and other digital assets for its clients. The same month, BlackRock, the world's largest asset manager, said it had invested in Bitcoin futures for the first time.

Other banks that have shown interest in Bitcoin include Morgan Stanley, Commerzbank, Goldman Sachs, JP Morgan Chase, and Germany's second-largest lender.

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