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FutureStarrBanks Warier of Serving Crypto Clients After Blowups Scrutiny
Following the collapse of many cryptocurrency-related firms and numerous banks' failure to service this industry, bankers serving clients in this space now face greater risks than ever before.
The Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of Currency have all cautioned banks about their involvement in crypto-related activities. They express concern that certain funding sources from crypto-asset related entities could pose increased liquidity risks to banking organizations.
After several crypto lenders went bust in 2019 - including Celsius Network and Genesis Capital - bankers are hesitant to serve any new crypto clients. They want to wait and see what happens over the next few months before re-entering the space.
Last year, the crypto-lending industry boomed as a means for crypto holders to generate income without selling their assets. This created an entirely new world in finance that is unconnected from traditional banking or government-issued currencies.
However, these lenders lacked safeguards and had no backup plan to protect customers in case of bankruptcy. Furthermore, they weren't regulated by securities regulators like conventional banks were.
Reports state that this led to the collapse of several companies, such as Celsius Network and Genesis Capital. This halted withdrawals by crypto clients and caused liquidations on other loans, according to reports.
Another issue was that many lenders failed to diversify their borrower portfolios by number or type, as traditional banks do. This means if a crypto hedge fund like Three Arrows Capital (3AC) experiences financial difficulty, it may affect other firms within its orbit as well.
Voyager Digital and other platforms lent 3AC money, but now face claims from the hedge fund after it defaulted on its loans.
But other crypto lending platforms, such as Nexo and BlockFi, remain unaffected. These lenders adhere to a more stringent lending policy which makes them immune from the same pressures experienced by centralized crypto-for-fiat providers since all borrowing is over-collateralized and market liquidity requirements are lower.
This is an unsettling situation for a sector that has grown rapidly and attracted billions of dollars in investment. But it also highlights the risks inherent to crypto-based lending, underscoring why bankers are becoming increasingly wary of serving crypto clients.
Cryptos remain a niche asset, yet regulators have become more skeptical of them. For instance, the SEC has raised doubts about the legitimacy of digital assets.
Banks have also become wary of providing cryptocurrency services, fearing scams and potential harm to consumers.
But banks also want to offer services that cryptocurrency owners and users can utilize. For instance, they could utilize their infrastructure for paying employees or transferring cryptocurrencies around the globe.
However, the current environment presents a challenge for these banks in serving crypto clients. It's an intricate landscape with numerous laws and regulations that may place heavy requirements on both parties involved - banks as well as their crypto customers.
Cryptos face an elevated risk that they could be banned from the financial system altogether. This would result in a severe liquidity crunch and put banks in an untenable situation.
Banks face a considerable risk, particularly in the United States, but it's one they must take because it is their duty to safeguard the public interest.
Cryptos will likely continue to rise and it is essential for banks to serve their customers who utilize cryptos, which requires making sure they understand the risks involved - something which may not always be easy.
Furthermore, banks must ensure they abide by existing laws such as consumer protection regulation. With more clarity on these regulations in place, banks could better avoid violations.
Despite these difficulties, many banks remain committed to serving their cryptocurrency clients as long as they can do so safely and securely. Furthermore, regulators have acknowledged the need for creating regulations specifically tailored towards crypto businesses - an encouraging sign.
Time and patience are required to sort through all the applications available, but it's no small task. Competition among fintechs and big boys (JP Morgan) is fierce - so for those in the know, a little extra work goes a long way towards acquiring and keeping customers. There's even an entire industry dedicated to winning over potential clients. Although it can be tedious work, the rewards are worth all of the effort; those with the latest tools will be best equipped to capitalize on these opportunities with customer satisfaction and loyalty as compared to those without.
Cryptocurrencies such as Bitcoin and Ethereum have seen unprecedented growth around the globe. These digital coins offer an alternative form of money free from traditional banking fees, providing people with access to trade and finance that would otherwise remain out of reach. Unfortunately, market volatility has proved a major deterrent for these businesses.
Despite these obstacles, some banks are still venturing into crypto-related services. JPMorgan Chase recently signed on Coinbase and Gemini as bank customers, while Fidelity Digital Assets launched a crypto fund.
Though their approach isn't perfect, it demonstrates that they are taking a more comprehensive approach than many other financial institutions when serving their customers. They have tailored both their technology and regulatory compliance architectures in order to better manage crypto-related risks.
However, although some banks are willing to accept and serve crypto-related clients, the industry as a whole remains at an advantage due to their aversion to taking on risks associated with cryptocurrency's volatile nature. Ultimately, most of them lack the capacity and willingness to deal with these challenges that come along with it.
Some banks, such as BNP Paribas and French private banking firm HSBC, are already providing custodial services for crypto. These solutions enable clients to manage their own assets more effectively while offering a transparent view of all assets for operational efficiency, risk management and compliance purposes.
Crypto currency continues to gain in popularity, prompting more businesses to explore the space. Some are even creating their own products and services related to crypto. Unfortunately, they often lack the expertise or infrastructure required for supporting a wide range of customers; leaving smaller firms and inexperienced investors seeking other methods for handling their funds.
With last year's collapse of FTX and an increasing number of enforcement actions by the Securities and Exchange Commission, banks are becoming increasingly wary about doing business with cryptocurrency firms. Not only have they severed ties with Binance and Silvergate, but they are also restricting their capacity for serving crypto customers as well.
Despite these obstacles, some large banks are beginning to take cryptocurrency seriously. Bank of America engineers recently filed the most patent applications related to digital payments technologies in their history.
At present, it remains uncertain whether crypto will revolutionize financial services or simply become a passing trend. If regulation does come into play, however, it must be done without completely shutting down crypto businesses.
Many crypto entrepreneurs are wary of the FDIC and Operation Choke Point, which has been used in the past to ringfence off financial services from other sectors of the economy. If this strategy is repeated, they may fear they'll lose their ability to serve customers effectively and make money as a result.
Due to these changes, the regulatory climate for crypto has become much more intricate and challenging for businesses to understand. Therefore, crypto businesses must adapt quickly and effectively in order to remain competitive in today's landscape.
If they fail to do this, their businesses will struggle and eventually disappear from the market. This is particularly true if crypto businesses operate globally and cannot keep up with changes that take place in their home countries. For instance, a website that caters to local crypto businesses must adjust its policies according to new laws and regulations in different nations; otherwise, it will have no choice but to close its doors permanently.