Wall Street will find ways to satisfy crypto envy

[MongiIG]

WASHINGTON (Reuters Breakingviews) - Banks are gearing up to get in on the crypto craze in 2022. That sets them up to wrestle with a host of issues that differ from their core business, from murky regulation to a market that operates 24 hours a day, seven days a week. Fights over profit and customers may also obscure other risks.

The value of digital currencies outstanding has tripled to more than $2 trillion since the start of 2020. Traditional U.S. banks currently can’t trade such assets themselves, but their customers do and many bankers want in, despite skepticism from luminaries like JPMorgan boss Jamie Dimon who dismissed bitcoin as "worthless" as recently as October. Dimon's bank, Goldman Sachs, Morgan Stanley and others are helping wealth-management clients gain exposure through crypto derivatives. Those trade on regulated exchanges, one step removed from the underlying digital coins. But that's little more than dabbling.

What would really open the flood gates for the largest banks would be the regulatory nod to get directly involved in the custody and trading of digital assets. Among other things, that would help stop lucrative hedge fund clients from going elsewhere for their crypto needs.

But banks, constrained by regulations, can't predict where watchdogs will end up. While the Federal Deposit Insurance Corp has expressed openness to increased crypto exposure, the Office of the Comptroller of the Currency has sounded skeptical and the Securities and Exchange Commission has essentially promised a crackdown if it ends up in charge of crypto.

Take bitcoin-backed loans, for example, one area that is being explored by several firms including Goldman. Banks need to know if regulators will permit such products. Bankers also have to figure out how to structure them if they can’t own the collateral directly.

The always-open crypto markets add another dimension. Banks are used to fixed hours of trading in equities, say. Many securities transactions take time, sometimes days, to settle, whereas digital currencies operate in seconds. Moreover, the whole point is that trades cannot be unwound, even if there are mistakes. Such features increase the importance of third-party digital custodians to help manage risk, and many of those entities are not, as yet, either regulated or transparent.

These are known unknowns. An even bigger danger could be unknown unknowns. Those range from the reliability of the decentralized confirmation processes attached to cryptocurrencies to the risk of hacks or errors that can't be righted. Wall Street's fear of missing out shouldn't obscure the risks of getting in.