Rethink – Banks Shed Crypto Skepticism Despite Bitcoin Crash

From the peak last November, the value of all cryptocurrencies has fallen by two-thirds to less than $1 trillion (almost 950 billion euros). Skeptics see themselves confirmed. For many cryptocurrencies, it is not even possible to determine an appropriate value, UBS chief executive Ralph Hamers said recently. “It’s almost like going to a casino.” UBS and most other major banks do not allow clients to trade cryptocurrencies directly.

Accordingly, investors are moving to specialized trading platforms such as Binance or fintechs. According to a survey by Boston Consulting Group, about 95 percent of all crypto assets — most cryptocurrencies — bypass traditional asset managers. This means that they are forgoing a very lucrative business. And that could be just the beginning.

“If customers find such a platform cool and easy to use, there is a risk that they will also leave the house bank for other services,” says Tobias Würgler of consultancy Oliver Wyman. That is why the US banks and also Swiss asset managers have started to get involved in the company. “Many banks are developing infrastructure that will allow them to manage digital assets on a technical and operational level,” said Alexandre Kech, blockchain expert at Citi.

“Tectonic Shift”
In extreme cases, the blockchain can deprive traditional banks of their business base. Because the technology not only creates the conditions for crypto trading, but for a whole range of transactions between two parties – without an intermediary central body such as a bank or an exchange. “This is a tectonic shift from the internet, over which information is exchanged, to the internet over which valuable things are sent,” explains Mathias Imbach, head of the Swiss crypto bank Sygnum.

UBS boss Hamers also assumes that blockchain applications will make transactions faster, safer and cheaper. Digital assets and decentralized finance (DeFi) could transform the industry over the next decade, Philipp Rickenbacher, head of private bank Julius Baer, ​​said last month. “As a result, today is the right time for us to invest in the long-term potential of digital asset technology.”

An example of DeFi is MakerDAO. This platform, basically just computer code, offers users fully automatic and staffless interest-bearing deposits in cryptocurrencies on the one hand and Lombard loans on the other. There are similar offers with SushiSwap in the exchange sector and with Nexus Mutual in the insurance sector.

The problem with most of these platforms: they are not suitable for the masses because no regulator controls them and the usability is limited. Companies like Sygnum are trying to bridge the gap between regulated, centralized institutions and unregulated, decentralized offerings. According to Imbach, bank interest rates have increased enormously since the spring of 2021. Ten institutions now use the Sygnum platform for trading and custody.

acquisitions expected
But not all banks should stop collaborating and buy instead. “Over the next three years, we will see more and more transactions,” said Philipp Cottier of blockchain investor L1 Digital. Several well-known American investment banks and also credit card companies looked around. Acquisitions will probably play a more important role than in previous years, Jupiter fund manager Guy de Blonay agrees. With monetary policy tightening by many central banks, access to capital for unprofitable fintechs is likely to become more difficult and expensive.

At the same time, their ratings collapsed. This creates buying opportunities for US and European financial institutions with excess capital. “Some of that could be used to acquire new technology at a lower cost to compete more effectively with disruptors,” de Blonay said.

Pioneers in Switzerland and Singapore
The German stock market has already struck. In 2021, she bought a majority stake in Swiss Crypto Finance for a three-figure million dollar amount. Since Switzerland, unlike many other countries, has already passed a blockchain law, the location is fertile ground for crypto firms, as is Singapore, explains Deloitte merger advisor Jean-Francois Lagasse. “Switzerland and Singapore will be the pioneers in this market.”

Boundaries fade away
The deals are also likely to happen in the opposite direction. Several larger crypto platforms are currently looking for smaller traditional banks to get a banking or broker license, says Cottier. “We have received several inquiries from blockchain companies from Asia, the US or the UK who want to buy a Swiss bank.” One hurdle, however, is the Swiss Financial Market Authority, which has to give the green light for a transaction. But one thing is clear: in the medium term, the lines between traditional financial firms and crypto firms will blur.