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Are banks investing in cryptos?

banks investing in cryptos

June 10, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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When Bitcoin was launched, financial institutions were very skeptical of them. Many banks warned people not to invest in Bitcoin, claiming that it was a bubble that would eventually burst. They gave many reasons why people should stay away, including the fact that they were a new and unregulated asset class. One significant reason banks and other traditional financial institutions may have stayed away from cryptocurrencies for so long is that they are a massive threat to them.

Cryptocurrencies as a threat to traditional financial institutions

In centralized financial systems, money always goes through the bank. If you want to buy something on Amazon, you authorize your bank to proceed with the payment, and they can choose to make the payment or not. Essentially, they are a middleman between you and Amazon. With cryptocurrencies, you will pay the institution directly as transactions are peer-to-peer. Additionally, many cryptocurrencies have lower transaction costs than banks. 

Despite the many arguments leveled against cryptocurrencies, they have continued to grow. Bitcoin, whose initial selling price was $0.08 per coin, surpassed the $50,000 mark in 2021. Today, there are thousands of cryptocurrencies, and many have practical value, including to the banks themselves (e.g., XRP). It is therefore not surprising that there are banks that are choosing to invest in cryptocurrencies.

How banks are investing in cryptocurrencies

There are regulations that prevent banks and traditional financial institutions from investing in unregulated and unclassified assets and securities. So how are these banks investing in cryptos? Some of them are choosing to participate in crypto-related developments allowed in the regulated frameworks indirectly. Here are examples of banks that are investing in cryptocurrencies;

  • J.P Morgan

There are two ways this bank is offering its clients a way to invest in cryptocurrencies. First, they are offering their clients a structured basket of stocks related to crypto-assets. The basket is designed to circumvent the U.S. Securities and Exchange Commission’s current regulations as their clients will not get direct exposure to cryptocurrencies. 

Secondly, according to CoinDesk, JPMorgan Chase has plans to roll out a Bitcoin fund to some of their clients soon. This fund will be available to their wealthy clients. Their institutional bitcoin shop NYDIG will be their custodian provider, and the fund will be actively managed. 

  • Goldman Sachs

After the surge of Bitcoin, Goldman Sachs said that it would launch a trading desk. It had launched one before, but they shut it down after Bitcoin’s crash in 2018. According to CoinDesk, they are now offering non-deliverable forwards (NDFs). This derivative is tied to Bitcoin’s price. To protect themselves, they are buying Bitcoin in futures through CME Group. According to CNBC, the bank had already traded two Bitcoin-linked derivatives successfully by May 7, 2021. 

Morgan Stanley is one of the first banks to give its clients access to Bitcoin funds. These funds are only available to its wealth management clients, and there is a threshold to how much you should have in assets with the firm to invest. They are offering three funds. Besides their clients, investment firms who meet a certain threshold can also gain access to these funds. 

Why more banks will invest in cryptocurrencies in the future

Despite the hesitation banks are showing to invest in cryptos, there is reason to believe that we will see more banks showing interest in the future. Here are five reasons why;

  1. Large institutions are showing interest - With the likes of Goldman Sachs and J.P Morgan showing interest in crypto-investing, they are paving the way for smaller banks to follow in their steps. If these banks can successfully carry out their transactions, they will help promote acceptance. 

  2. Increasing demand and consumer interest - There are several reasons why consumers are showing interest in Bitcoin. Bitcoin’s blast past the $50,000 mark, Tesla’s purchase of $1.5 billion worth of Bitcoin, and Paypal’s introduction of crypto-payments are great shows of faith in cryptocurrencies by large institutions. It should come as no surprise that Morgan Stanley’s funds were partially driven by their client’s demand for exposure to Bitcoin. As more institutions show interest in cryptocurrencies, more individuals begin to trust them and invest in them. 

  3. Regulation easing and guidance - Governments are conceding to the fact that cryptocurrencies may be here to stay. Now, rather than keep fighting, some are looking for ways to regulate the cryptocurrency market. These regulations may make it possible for banks to enter the crypto-arena comfortably. 

  4. The utility value of blockchain technology - Most cryptocurrencies work thanks to an underlying blockchain network. Banks can find a lot of value in understanding and implementing blockchain networks. For example, they may be able to lower transaction costs. 

  5. Utility of some cryptos - Some cryptos like XRP are already seeing acceptance with big financial institutions thanks to their utility values. Banks may be convinced to invest in cryptocurrencies that show great utilitarian value.

Conclusion

It may have taken some time, but banks are finally warming up to cryptocurrencies. There is still a long way to go before they see acceptance in more banks. Yet, big banks like J.P Morgan and Goldman Sachs allowing investment in cryptocurrencies and crypto-related assets will go a long way in helping other financial institutions to trust cryptocurrencies.  

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