Banks Embrace Crypto: How Many Are Investing?

Cryptocurrency has gained significant traction in recent years, and financial institutions are taking note. Crypto-friendly banks are financial institutions that have policies and practices favourable towards cryptocurrency transactions and related activities. In 2021, 55% of the top 100 banks invested in blockchain and/or digital currency spaces. As of May 2022, 61 banks have invested at least once in this space, with 23 banks making at least one investment in blockchain/crypto-linked entities between August 2021 and May 2022. The most active investors during this period were KB Financial Group, United Overseas Bank, Citigroup, Goldman Sachs, and the Commonwealth Bank of Australia. The crypto banking landscape is uncertain, but industry experts believe new players will fill the void.

Banks' crypto investment plans

As the cryptocurrency industry expands, banks are increasingly recognising the potential benefits of integrating digital assets and blockchain technology into their operations. Blockchain technology, in particular, is attractive to banks due to its transparency, security, and ability to accurately record transactions, reducing the risk of fraud. As a result, many banks have started to invest in blockchain companies and digital currencies.

In 2021, 55% of the top 100 banks by assets under management (AUM) had some stake in the blockchain world, either through crypto assets or investments in blockchain-based companies. This proportion has since increased, with 61 banks having invested in the space as of May 2022.

Some of the major banks that have made significant investments in the crypto industry include:

• Standard Chartered: The London-based bank has invested $380 million in six investments in blockchain companies, including Ripple and Cobalt.
• BNY Mellon: With a total investment of $321 million in five companies, BNY Mellon has focused on crypto custody services, partnering with companies like Fireblocks.
• Citibank: Citibank has made 14 investments in blockchain companies, totalling $279 million. One of its notable investments is SETL, a company that uses ledger technology to facilitate asset transfers.
• UBS: The Swiss bank has invested $266 million in five investments, including Axoni, a company that modernises capital market infrastructure using blockchain technology.
• BNP Paribas: The French financial group has invested $236 million in nine blockchain companies, including Digital Asset, which develops real-time trade and settlement applications using smart contracts.
• Morgan Stanley: The investment bank has invested $234 million in three blockchain companies, including NYDIG, a crypto custody firm, showcasing its commitment to providing secure storage solutions for digital assets.
• JP Morgan Chase: The largest US bank has invested $206 million in eight blockchain companies, including ConsenSys, a leading Ethereum software company, demonstrating its belief in the potential of Ethereum.
• Goldman Sachs: Goldman Sachs has invested $204 million across eight blockchain companies, including Coin Metrics, providing it with access to blockchain data for market insights and informed investment decisions.

These banks have recognised the potential of the crypto industry and made investments to explore blockchain technology, provide crypto custody services, and meet the evolving needs of their clients in the digital age.

Crypto investment risks

As of May 2022, a total of 61 of the world's top 100 banks by assets under management (AUM) have invested in companies operating in the blockchain and/or digital currency spaces, either directly or through subsidiaries. This represents a stable outlook and is expected to drive more investment participation from banks in the near future.

However, investing in cryptocurrencies is not without its risks. Here are some of the key crypto investment risks to consider:

Volatility and Price Fluctuations

The cryptocurrency market is highly volatile and susceptible to rapid price fluctuations. Wild swings in value can occur within a day or even within minutes, making trading a dangerous venture. For example, in February 2018, the price of Bitcoin dropped to under $7,000, just a few months after reaching an all-time high of over $20,000 in December 2017.

Unregulated and Decentralized Nature

Cryptocurrencies are currently unregulated by governments and central banks, which means there is limited oversight and investor protection. The decentralised nature of cryptocurrencies also means that technical glitches, human error, or hacking can occur, potentially resulting in financial losses.

Cyber-Security Risks

Trading platforms and third-party service providers in the cryptocurrency space are vulnerable to hacking or other malicious activities. In August 2016, for instance, nearly 120,000 units of Bitcoin, worth US$72 million, were stolen from the Bitfinex exchange in Hong Kong. This incident led to an immediate 23% drop in Bitcoin pricing.

Loss of Private Keys

Bitcoins and other cryptocurrencies are typically stored in a digital wallet and controlled by both a public and private key. If the private key is lost, destroyed, or compromised, investors may lose access to their digital assets. Additionally, if a third party acquires the private key, they may gain unauthorised access to the investor's cryptocurrencies.

Regulatory and Tax Risks

The legal status of cryptocurrencies varies across different jurisdictions, and regulations can change rapidly. This creates uncertainty for investors, especially regarding tax treatment and potential restrictions on the acquisition, ownership, or use of digital currencies.

Network and Platform Risks

The blockchain networks that underpin cryptocurrencies can experience slowdowns or disruptions due to high transaction volumes or other technical issues. Additionally, trading platforms and exchanges may suffer from fraud, business failure, or security breaches, leaving investors vulnerable to financial losses.

Crypto investment options

Investing in cryptocurrency is risky, so it's important to be cautious and not invest more money than you can afford to lose. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks.

Buy Cryptocurrency Directly:

You can choose to directly purchase and store one or more cryptocurrencies. Your options range from well-known digital currencies like Ethereum and Bitcoin to newly released coins.

Invest in Cryptocurrency Companies:

You can invest in companies with a partial or total focus on cryptocurrency. This includes cryptocurrency mining companies, mining hardware makers, and companies that support cryptocurrency, such as Robinhood Markets Inc. and PayPal Holdings Inc. You can also invest in companies that hold large amounts of cryptocurrency on their balance sheets, like MicroStrategy Inc.

Invest in Cryptocurrency-Focused Funds:

If you don't want to choose individual companies, you can invest in a cryptocurrency-focused fund. There are exchange-traded funds (ETFs), index funds, futures funds, and cryptocurrency investment trusts. In January 2024, the US Securities and Exchange Commission approved the first Bitcoin Spot ETFs, which hold bitcoin and offer shares based on spot prices.

Invest in a Cryptocurrency Roth IRA:

Investing in a cryptocurrency Roth IRA combines the tax advantages of an individual retirement account (IRA) with cryptocurrency investments. Using a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.

Become a Crypto Miner or Validator:

Mining or validating cryptocurrencies can be a direct way to invest in them. Miners and validators can earn rewards in crypto, which they can hold as investments or exchange for another currency.

Banks Investing in Cryptocurrency:

As of 2021, 55% of the top 100 banks by assets under management (AUM) invested in blockchain and/or digital currency spaces. From 2021 to 2022, at least 23 banks invested in blockchain/crypto entities, including Morgan Stanley, BNY Mellon, Citigroup, and United Overseas Bank.

The most active investors in blockchain companies include KB Financial Group, United Overseas Bank, Citigroup, Goldman Sachs, and Commonwealth Bank of Australia.

Some of the largest banks have pushed roughly $3 billion in funding into cryptocurrency and blockchain companies. Here are some examples:

• Standard Chartered: $380 million in 6 investments
• BNY Mellon: $321 million in 5 investments
• Citibank: $279 million in 14 investments
• UBS: $266 million in 5 investments
• Morgan Stanley: $234 million in 3 investments
• Goldman Sachs: $204 million in 8 investments

Crypto investment products

Banks are investing in this area to cater to the changing needs of their clients and to increase their productivity and lower expenses. Crypto investment products also offer better security and transparency.

Custody solutions and technology providers are popular among banks, with some of the largest funding rounds since August 2021 going to companies in this field, including NYDIG, Fireblocks, Gemini, and Anchorage Digital.

Some banks are also investing in blockchain infrastructure. For example, J.P. Morgan Chase developed Onyx, the first bank-led blockchain platform, which supports domestic and cross-border payments.

Crypto-friendly business bank accounts are also becoming more common, with providers such as Mercury, U.S. Bank, Chase, BankProv, and Revolut offering varying levels of support for crypto-related businesses. For example, U.S. Bank offers an internal cryptocurrency custody service, while Chase has its own bank-led blockchain platform.

Overall, the growing interest in crypto investment products from banks and the increasing number of crypto-friendly business bank accounts indicate that the cryptocurrency market is becoming more integrated into the traditional financial system.

Crypto investment considerations

The crypto market has experienced significant volatility, and while the long-term trend has been positive, there is still scepticism and opportunism in these markets. As such, investors should consider the following:

Risk and Volatility

Crypto is a relatively new and extremely volatile asset class. It can gain or lose significant value in a single day. For instance, Bitcoin has experienced three distinct drawdowns of at least 70% in the past ten years. In comparison, US equities have only experienced one such drawdown in the past century during the Great Depression. Therefore, investors should only allocate a small portion of their portfolio to crypto, with a general rule of thumb being no more than 5%. Additionally, investors should be prepared for continued volatility and turbulence, especially in the near future.

Security and Custody

One of the most important aspects of investing in crypto is keeping it safe. Investors can choose to keep their crypto with a trusted custody provider or crypto trading platform, or they can opt for a more hands-on approach by using a private digital wallet or physical cold wallet. It is important to note that if investors choose to manage their own security, they may lose access to their coins forever if they are hacked, phished, or if they transfer their coins to the wrong wallet address.

Due Diligence and Fundamentals

It is crucial for investors to educate themselves about the crypto landscape, the technology behind it, and the risks involved. Investors should be able to explain the value of blockchain technology and understand the fundamentals of the specific crypto they are interested in, such as Bitcoin's mining process. Additionally, staying up to date with the latest crypto news and government regulations is essential, as new developments and decisions can impact the market.

Tax Implications

Currently, crypto is taxed similarly to stocks, with capital gains taxes triggered when investments are sold at a profit. However, there are nuances to consider, such as paying for goods and services with crypto, which may also trigger tax consequences. Given the evolving nature of the industry, tax rules can change rapidly, so investors should consult with tax professionals to ensure accurate and compliant filings.

Diversification and Portfolio Goals

Crypto may not be suitable for investors looking to diversify their portfolios or those saving for particular short-term goals due to its unpredictability. However, for investors considering crypto as a long-term investment strategy, it is essential to consult with a financial advisor to determine how crypto assets fit with their portfolio strategy, financial goals, time horizon, and risk tolerance.

Frequently asked questions