Crypto market crisis boosts opportunities for banks

The bad news from the world of cryptocurrencies does not stop coming. The insolvency of crypto exchange FTX is currently the best-known – albeit not the last – link in a long chain of bad tidings from the crypto market. Back in May 2022, there was a crash of the supposed stablecoin LUNA/UST from the Terra ecosystem. Singapore-based cryptocurrency hedge fund Three Arrows Capital (3AC) was ordered to liquidate in June. Then, in early July, two crypto platforms, Celsius Network and Voyager, went bankrupt due to their LUNA and UST exposure and their connection to 3AC.

The most recent victims of the bankruptcy wave were the crypto exchange BITFRONT and the crypto lender BlockFi at the end of November. The global crypto market lost about two trillion USD in 2022. Trust in cryptocurrencies has been shaken.
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Demand for more regulation

Against this backdrop, calls for effective regulation are growing louder. For example, ECB President Christine Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs in late November that regulating cryptocurrencies in the EU was an absolute necessity. Currently, “Markets in Crypto-Assets” (MiCA), a draft regulation from the EU Commission, is already on its way through the European Parliament. Before the Committee, Lagarde has now outlined the need for a MiCA II, which would further expand the scope of regulation and supervision.

MiCAR: the regulatory framework for crypto assets has been fleshed out
MiCAR: the regulatory framework for crypto assets has been fleshed out
The EC published its digital finance strategy on September 24, 2020. Its key element is the proposal for a Regulation on Markets in Crypto-assets (abbreviated as MiCAR). Is MiCAR a real game changer for the crypto industry?
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Regulatory efforts are also gaining momentum in the United Kingdom. The UK government is apparently envisaging extensive powers for the Financial Conduct Authority (FCA) in the crypto sector and access restrictions to the UK market for foreign providers.

Too much risk, too little transparency

It should not be assumed, however, that the failure of major crypto companies last year already signals the end for the principle of blockchain-based cryptocurrencies. Rather, it seems that the insolvent crypto companies repeated some of the mistakes that also led to the 2008 financial crisis. The major crypto insolvencies are the result of a lack of oversight and transparency, poor risk management and too much unregulated centralization.

In addition to the lack of oversight, FTX was probably also doomed to failure as it had close ties with the hedge fund Alameda Research, which in turn meant investments in various companies. FTX’s own FTT token was held in large part by crypto exchange Binance, which eventually liquidated FTT-backed loans.

Crypto is here to stay

Investors, at least, still seem interested in crypto assets and currencies. This should be even more true if the crypto investment partners are trustworthy and subject to meaningful regulation. A study by Visa titled “The Crypto Phenomenon: Consumer Attitudes & Usage”[1] from December 2021 found that 94 percent of the target group analyzed are aware of the crypto option. Of the 21 percent of active users of crypto investments, however, 87 percent would have liked crypto offerings from their bank even at that time.

As long as this demand exists, financial institutions would be well advised to address the issue. Otherwise, there is a risk of losing customers and assets. Especially since the Big Techs from Apple to Tesla continue to address crypto issues as well.

The bank as the ideal interface

Established financial institutions have good reason to continue their crypto projects. The current crisis in the crypto market is also an opportunity. From the investors’ perspective, a crypto offering from their own regulated bank solves several problems at once, as it bridges the gap between the security and convenience needs of investors. If a regulated financial institution acts as the custodian of crypto investments, investors have to worry far less about whether their wallet is kept safe.

Moreover, access to crypto assets can be made much easier, especially since investors are dealing with a convenient one-stop shop – be it for traditional assets or crypto assets. Investment advisors can educate them about risks and help them diversify their portfolios. And with a financial institution as the orchestrator of today’s and tomorrow’s crypto services, efficiency and convenience for customers will continue to increase. Custody of assets from the metaverse, staking, payments and even tokenizations can thus be sourced through a single, trusted partner. Despite the current crisis: for banks and asset managers, the crypto world still holds great potential.

[1] Visa’s Global Crypto & Fintech group (2021): The Crypt Phenomenon: Consumer Attitudes & Usage

What opportunities do you see for banks in the crypto market?

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Dr. Nils Bulling / author BankingHub

Dr. Nils Bulling

Head of Strategic Innovation, Ecosystem & Digital Assets Avaloq

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