Cryptocurrency’s $2.88 trillion USD market cap and its over 200 million users have proved too important for major US banks to overlook. One of them, U.S. Bank, released a report that summed it up by saying that Bitcoin and cryptocurrencies are “too large to ignore.”
This comes barely one month after a Fidelity Digital Assets report found that 90% of institutional investors surveyed in the US find digital assets appealing. Of the 1,100 investors interviewed, 80% felt that digital assets have a place in investment portfolios.
It is these institutional investors that are pushing traditionally inflexible financial institutions to pivot quickly and cash in on the potential of the crypto industry.
Bank of America’s Digital Assets Research
In a recent report titled Digital Asset Primer in Brief: Only the first inning, Bank of America’s analysts Alkesh Shah and Andrew Moss highlighted the opportunities in crypto that BofA is willing to explore.
To quote the report,
“Our view is that there could be more opportunity than skeptics expect.”
Bank of America Global Research carried out year-long research covering Bitcoin, alternative cryptocurrencies and blockchain in general. It delved into the intricacies of what it termed a “new asset class,” showing that Wall Street is increasingly warming up to crypto.
BofA Report Highlights
The report focused not so much on Bitcoin, the world’s largest cryptocurrency by market capitalisation, but on how the “digital asset ecosystem” has attracted significant investment. In their own words,
“Bitcoin is important with a market value of ~$900bn, but the digital asset ecosystem is so much more.”
The report did express a lot of optimism for BTC and other cryptos in the world’s foremost financial markets “despite its many controversies.” They were referring, of course, to crypto’s high volatility, security and other concerns.
The report seemed to lump together Bitcoin and cryptocurrency, saying that “tokens are to the future Web3 what websites were to Web1.”
The Token Economy and DApps
The report on digital assets singles out tokenisation and its role in blockchain transformation. The fastest-growing cryptos, according to the report, are those running decentralised applications (DApps), platforms such as Ethereum and Cardano.
The report compared these platforms to Apple’s iPhone and its App Store, where developers can build all kinds of projects, which results in massive opportunities in the future.
For example, the report noted, hundreds of companies are coming up to leverage the power of blockchain applications in industries such as finance, supply chain, identity, e-commerce, data storage and social media.
NFTs and DApps
The report was also quick to mention the craze that is Non-Fungible Tokens (NFTs). These digital assets represent music, art, gaming items, videos, collectible merchandise, and other digital assets.
NFTs have seen meteoric growth in the recent past, reaching over $3 billion USD in sales during the month of August alone.
In addition to NFTs, BofA touched on Stablecoins (tokens backed up by stable assets like the US dollar) and central bank digital currencies (CBDCs, a digital form of fiat currency.) These digital “currencies” could have a big impact on monetary policy, inflation, regulation, transaction costs and more.
Summing it all up, the report stated:
“It’s difficult to overstate how transformative blockchain technology, digital assets and the thousands of decentralized apps that have yet to be created could potentially be.”
However, the report also notes that a strong regulatory environment is required to help these digital opportunities come into maturity. US authorities have no plans to ban crypto, but future regulatory actions could be a tailwind for crypto.
U.S. Bank Launches BTC Custodial Service
While the Bank of America was researching crypto’s future, U.S. Bank was taking steps to launch a pioneering cryptocurrency custody service. In an announcement covered by CNBC, U.S. Bank said that its crypto custody service will only be available to fund managers.
Covering Bitcoin, Bitcoin Cash, and Litecoin, the service will allow the bank to store private keys for fund managers and help them instil confidence in their clients.
Bold Move Helps Legitimise Crypto Asset Class
The move by the bank is the latest at a time when major financial institutions are slowly accepting the legitimacy of cryptocurrency investment. However, U.S. Bank is hardly the first to offer custodial services.
- Bank of New York Mellon launched a “speculative” crypto custody service in early 2021.
- State Street will provide crypto services such as reporting, reconciliation, and processing to private clients.
- Northern Trust and Standard Chartered partnered to launch Zodia, a crypto platform offering custody services for BTC, ETH, XRP, LTC, and BCH.
While no major bank here in Australia has made such large steps, it is a very encouraging move for crypto enthusiasts and could spark similar moves in Europe, Asia, and even here.
Institutional and Corporate Clients Pushing Interest in Crypto Services
U.S. Bank surveyed its biggest clients to find out if they were interested in crypto services. This all started in July 2020, when the US government allowed regulated banks to “custody virtual assets” provided specific conditions were met.
The survey revealed that there was broad interest in crypto, and not just limited to niche players as previously believed. Kedia said during the announcement:
“Our clients are getting very serious about the potential of cryptocurrency as a diversified asset class … I don’t believe there’s a single asset manager that isn’t thinking about it right now.”
She went on to say that some of U.S. Bank’s institutional clients already have positions in Bitcoin and were just waiting for custody services to become available.
Demand for Services to Rise as SEC Approves First Crypto ETF
Kedia said that she expected the demand for crypto services to rise once the US Securities and Exchange Commission (SEC) approves a Bitcoin ETF, which happened in mid-October.
The SEC recently approved the ProShares Bitcoin futures ETF to start trading on stock exchanges, allowing institutional investors in the US to gain indirect access to the crypto market.
Bitcoin ETFs refers to Exchange-Traded Funds that either hold or track the value of Bitcoin and can be traded on traditional exchanges. Investors can invest in the ETFs without a direct link to Bitcoin and crypto exchanges.
That means the price of the Bitcoin ETF would fluctuate as the price of BTC changes. The SEC approval is a major milestone for investors who like to follow crypto but remain averse to the high risk in the industry.
As Kedia said, this approval will make cryptocurrency trading more accessible to the public and increase the demand for banking services.
ProShare’s first day of trading the Bitcoin Strategy ETF (ticker: BITO) raked in $550 million USD, with more than $1.01 billion USD changing hands. BITO made history as one of the biggest ETF launches in history.
That’s despite the minor inconvenience of BITO not tracking the actual Bitcoin’s price movements, which is yet to be allowed.
The development caused the price of BTC to spike by more than 4% to $64,206 USD ($85,564 AUD), according to CoinMetrics. On the following day, BTC reached a new all-time high of $66,900 ($89,154 AUD).
The SEC is also expected to approve a handful of other BTC futures ETFs, but it is still reluctant to approve an ETF investing in the currency itself.
Banks Don’t Want to Be Left Behind
According to Financial Times, banks have a very real “cryptocurrency problem” on their hands. Crypto is highly volatile, and they can’t dabble in it within their current, mostly archaic, regulatory frameworks.
Crypto is also very high-tech. Banks can’t move fast enough to adjust to the technicalities of crypto custody, trading, or even crypto tracking and forecasting.
Most importantly, crypto feels new and highly uncomfortable to established banks. Even organisations like Goldman Sachs are doing nothing substantial for or against crypto, preferring to watch and wait.
However, fear of missing out (FOMO) in the huge crypto market is forcing these institutions to take a second look at what is supposed to be their enemy.
Case in point: in February 2021, German lender Commerzbank said that the bank “does not consider it to be its responsibility to comment on the price development of purely speculative investments or to predict it.” As of October, the institution has established a digital assets team.
Conclusion
Traditional financial institutions can no longer ignore cryptocurrencies such as Bitcoin. More importantly, they can’t ignore the technological impact of blockchain and its derivative technologies.
Crypto is still very young and untrusted among the world’s biggest financial players. However, the reputation and client base that traditional financial institutions have is very desirable to the crypto market.
We will continue to see banks dive in, tentatively at first, similar to what BofA and U.S. Bank are doing. However, these are promising signs, and adoption by traditional institutions will only further the value of Bitcoin and crypto.