Crypto-Friendly Banks: Who's Investing And Why?

Despite the volatile nature of cryptocurrencies, many leading banks have been cautiously entering the digital asset and DeFi markets. As of May 2022, 61 banks had invested at least once in blockchain or crypto-linked entities, with the most active investors being KB Financial Group, United Overseas Bank, Citigroup, Goldman Sachs, and the Commonwealth Bank of Australia. Large banks like JPMorgan Chase, Goldman Sachs, and Bank of America have launched crypto trading desks, while wealth management firms like Morgan Stanley and Wells Fargo provide access to crypto through their products and funds. The entry of traditional banks into the crypto space is expected to drive further investment participation and increase mainstream adoption of digital assets.

Banks investing in blockchain

Despite the volatility of cryptocurrencies, many leading banks have been investing in blockchain and crypto companies. In August 2021, 55% of the top 100 banks (by assets under management) invested in blockchain and/or digital currency spaces, either directly or through subsidiaries. This number has since grown, with 61 banks investing in this space as of May 2022.

The most active investors in blockchain companies during the cycle from August 2021 to May 2022 include KB Financial Group, United Overseas Bank, Citigroup, Goldman Sachs, and the Commonwealth Bank of Australia. These banks have participated in some of the biggest funding rounds for blockchain companies, with Morgan Stanley, Goldman Sachs, BNY Mellon, Commonwealth Bank of Australia, and Citigroup leading the way.

Custody solutions and technology providers have been popular areas of investment for banks, with companies like NYDIG, Fireblocks, Gemini, and Anchorage Digital raising large funding rounds. Blockchain infrastructure has also been a focus for banks, with the Canton Network being a notable example. Launched in May 2022, the Canton Network is a global blockchain network of networks for financial market participants and institutional assets, focusing on the tokenization of real-world assets.

In addition to investing in blockchain companies, many banks have also been entering the digital asset and DeFi markets. Large banks like JPMorgan Chase, Goldman Sachs, and Bank of America have launched crypto trading desks, while wealth management firms like Morgan Stanley and Wells Fargo provide access to crypto through their products and funds.

The growing interest and investment in blockchain and crypto by banks indicate a stable outlook and are expected to drive more participation from banks in the future.

Crypto as a mainstream investment

Crypto is becoming an increasingly mainstream investment option, with 20% of American adults and 13% of Canadians currently owning crypto assets or funds. This is despite the fact that cryptocurrencies are highly volatile assets, with the global market cap dropping from $3 trillion in November 2021 to $800 billion in November 2022.

However, the popularity of crypto among consumers has led to many large banks embracing the asset class. Around 55% of the top 100 banks (by assets under management) have invested in blockchain and/or digital currency companies, either directly or through subsidiaries. These include major financial institutions such as Morgan Stanley, BNY Mellon, Goldman Sachs, and Commonwealth Bank of Australia.

Some banks have launched crypto trading desks and wealth management services that provide access to crypto. For example, Citi has created a digital assets group to help customers invest in cryptocurrencies, while JPMorgan Chase has received regulatory approval for its crypto wallet trademark. Additionally, banks like U.S. Bancorp, BlackRock, Fidelity Investments, and JPMorgan Chase support digital asset custody.

The embrace of crypto by banks is driven by the desire to attract younger customers, create new revenue streams, and increase market share by providing access to cryptocurrency. Crypto is also seen as a way to improve financial inclusion, enhance transaction speed and security, and benefit from the efficiency of blockchain technology.

While crypto is becoming more mainstream, it is still a highly speculative and volatile investment. Investors need to be aware of the potential for significant financial losses and the lack of regulatory infrastructure in the crypto space.

Crypto's regulatory future

The regulatory future of cryptocurrencies is a complex and evolving topic. Currently, cryptocurrencies are lightly regulated, and the right approach to regulation will depend on how the cryptoeconomy evolves. Some countries have written or are considering writing rules specifically for crypto-assets, while the wider trend is to regulate crypto-asset activities similarly to existing similar financial activities.

To ensure the protection of stakeholders, some new regulatory frameworks may be required. Crypto-assets are global in nature, so global standards are needed, even though regulation and tax policy will likely remain at the national level. Policymakers should study and monitor crypto-powered systems to understand their evolution and how to regulate them effectively. This is especially challenging when it comes to regulating a system driven by decentralised software. However, the interfaces between the cryptoeconomy and the conventional economy, such as digital wallets and crypto-exchanges, can be regulated using existing rules such as Anti-Money Laundering regulations.

The future of crypto regulation is already taking shape, with regulatory bodies announcing new frameworks for cryptocurrency companies. For example, the Conference of State Bank Supervisors in the US has launched a regulatory framework for payment companies, money service businesses, and cryptocurrency companies. This framework will regulate payment services that transfer over $1 trillion in customer funds annually. Additionally, the Financial Action Task Force has extended the travel rule to include virtual assets and exchanges, requiring virtual asset service providers to share user identities for transactions over $1,000.

The increased regulation and law enforcement that is coming will lead to exponential increases in the adoption of digital assets. It will provide consumers with a safety net and the rules needed to feel confident in investing in cryptocurrencies. As a result, banks and financial institutions are entering the digital asset and DeFi markets, with many leading banks cautiously launching crypto trading desks and wealth management firms providing access to crypto.

Overall, the regulatory future of cryptocurrencies is still taking shape, but increased regulation is inevitable. This will provide much-needed protection for consumers and investors, leading to broader adoption of digital assets and potentially making crypto a relatively "non-risky" asset class in the foreseeable future.

Crypto's impact on small businesses

While cryptocurrencies are still relatively new, they have the potential to introduce significant changes to the way small businesses operate. Here are some ways in which cryptocurrencies can impact small businesses:

Impact on Payment Methods

Small businesses may face increasing pressure to accept cryptocurrencies as a form of payment for their goods or services. Many large corporations, such as Microsoft and Amazon, already accept cryptocurrencies, and their credibility has inspired smaller businesses to follow suit. Consumers are also increasingly requesting that businesses allow them to spend their cryptocurrency tokens. By accepting cryptocurrencies, small businesses can attract new customers, especially those looking to use their cryptocurrency earnings. Additionally, cryptocurrencies can facilitate international transactions, allowing small businesses to reach a global market.

Transaction Security and Efficiency

Blockchain technology, which underpins cryptocurrencies, offers enhanced transaction security and efficiency. It provides a nearly fraud-proof system by maintaining a decentralised digital record of each transaction, making verification easy and secure. This can reduce the risk of chargebacks or fraud associated with credit card transactions. Additionally, blockchain technology enables transactions without third-party verification, reducing processing fees and speeding up transactions.

Volatility and Regulatory Uncertainty

The cryptocurrency market is known for its volatility, with frequent value fluctuations that can be unpredictable for small businesses. This volatility can introduce financial risks for businesses that accept or invest in cryptocurrencies. Additionally, the regulatory environment surrounding cryptocurrencies is uncertain, as governments seek to implement laws and regulations to control the crypto market. These regulations could impact the advantages that cryptocurrencies currently offer.

Data Privacy and Customer Anonymity

Blockchain technology enhances data privacy and security for small businesses. It enables the use of smart contracts, which can streamline processes and improve security measures. Additionally, cryptocurrencies offer varying degrees of anonymity for users, preventing their data from being sold to advertisers. This anonymity also reduces the need for refunds, as customer identities cannot be verified.

Impact on Banking and Traditional Financial Institutions

The adoption of cryptocurrencies and blockchain technology by small businesses can disrupt the traditional banking sector. Cryptocurrencies were created to sideline governments and banks, and their decentralised nature eliminates the need for middlemen in financial transactions. This can reduce fees and streamline the transfer of funds for small businesses. However, it also presents a challenge to traditional financial institutions, which may need to adapt their services and explore opportunities in the digital asset space to remain competitive.

Crypto's popularity with younger investors

Cryptos Popularity with Younger Investors

Cryptocurrency is growing in popularity across North America, with Bitcoin and Ethereum being the most preferred among users. A recent survey by Coinbase shows that 20% of American adults currently own crypto. This is despite the fact that cryptocurrencies are considered a volatile asset with wild price fluctuations.

Younger investors are particularly keen on crypto. An Investopedia survey showed higher adoption of crypto by younger professionals. Of the millennials surveyed, 64% indicated that they have investments, and 38% have some kind of cryptocurrency investments. Gen X and Gen Z are also bullish on crypto, with 28% and 23% owning cryptocurrencies, respectively.

There are several reasons why younger generations are investing in crypto:

• Technological fluency: Younger people have grown up with the technology that cryptocurrencies rely on, such as the internet, smartphones, and computers. This makes them more adaptable to technological advancements.
• Distrust in traditional financial institutions: Due to financial recessions and economic difficulties in recent decades, younger people have developed a lack of trust in traditional financial institutions. The decentralized nature of cryptocurrencies provides a viable alternative to regulated, centralized institutions.
• Ease of access to crypto: Investing in traditional institutions can be complicated and intimidating for new investors. Cryptocurrency, on the other hand, is more accessible and does not require knowledge of how to open a brokerage account or participate in trades.
• Social media influence: Social media campaigns and influential individuals on platforms like Twitter can affect the market price of Bitcoin and other cryptocurrencies, exposing even those who weren't planning on investing to the world of crypto.

While younger investors are enthusiastic about crypto, there are also many skeptics. Across age groups, more than 40% of respondents in the Investopedia survey said that cryptocurrency is too risky or too confusing.

Frequently asked questions