https://ift.tt/3eQckjc in crypto: opportunities and challenges

2022 could be the year when banks finally enter the crypto sector. 

This is what Reuters claims.

Why banks need to enter the crypto sector

Bitcoin was born as a response to a crisis triggered by a broken banking system that resulted in the subprime mortgage crisis, and the iconic bankruptcy of Lehman Brothers. However, to think that banks and Bitcoin could have diametrically opposed paths today is sheer madness, not because of the nature of Bitcoin, but because of the nature of banks. 

It is simply impossible for them to ignore a $1 trillion asset, which is credited as a safe haven against inflation and which attracts the attention of the world’s richest men and institutional investors. Just as it is impossible to ignore the entire crypto sector which has reached a capitalization of 3 trillion in the past few months.

If the banks do not intervene, they can only watch the exchanges take their place. 

The unknowns

But what is holding them back? The lack of regulation is a first aspect highlighted by Reuters. The authorities are proceeding in different ways, and while some are open to it, such as the Swiss FINMA, there are also those who remain fearful, such as the SEC which persists in not approving Bitcoin ETFs. 

And then there is volatility: what services can be offered with assets that can fluctuate by 20% in just 24 hours? To these questions, the financial teams of the biggest banks are trying to give an answer. 

It is worth mentioning that the cryptocurrency market is open 24 hours a day. Banks will have to gear up to follow trading well beyond the period between Monday and Friday. 

The challenges

Today, banks may decide to venture into collateralized lending in Bitcoin. They would take the field away from decentralized finance. Banks can offer the security of being regulated and bound to protect their customers. The same cannot be said for DeFi protocols, decentralized by nature, which have struggled against hacks and scams that have threatened to undermine their credibility. 

Here too, the aim is to steal capital from decentralized finance, which is now worth $101 billion. 

Another aspect that worries the banks is the fact that mistakes are not allowed when it comes to cryptocurrencies: transactions cannot be cancelled. Whether it’s a hack or an employee’s mistake, the funds moved won’t come back. And this implies that banks will have to work on two aspects: preparation and security. 

There is another issue that could force them to participate in the crypto and blockchain sector: the launch of digital state currencies, which seems a foregone conclusion, albeit indefinite in terms of time. It is to be expected that a digital currency managed by central banks is something that private banks will certainly be comfortable with, much more so than with assets like Bitcoin or stablecoins. 

Who has already entered the sector

There are banks like JP Morgan that have been exploring the blockchain and cryptocurrency sector for some time. CEO Jamie Dimon is not a fan of Bitcoin but has had to acknowledge that his clients are interested in it. That’s enough to explain why JP Morgan offers cryptocurrency investments to clients with the most profitable portfolios. It is not an actual trading service, but if this is the promise, it is to be expected that trading will come sooner or later.

Meanwhile in Italy, Banca Generali has just announced that it will allow its customers to trade Bitcoin. It will be the first to do so in this country. 

And then there are crypto or digital realities that have obtained banking licences. For example Revolut is increasingly evolving into a full-fledged bank. But Kraken has also obtained a banking licence in the United States. 

A sign that the fate of cryptocurrencies and banks is bound to intersect.