Goldman’s Bitcoin Skepticism Warns Asian Banks

The overwhelming FOMO momentum emerging from crypto circles promises to make 2022 a rocky year for Asian banks.

Whether it’s fear of missing out or hard-nosed business decisions driving the trend, several institutions are taking the plunge. This is especially true in Southeast Asia, where Singapore’s DBS established a crypto Platform for digital exchange.

In Thailand die Siam Commercial Bank grabbed a 51% share at cryptocurrency trader BitKub. More recently, the Union Bank of the Philippines is planning to do so Offer crypto trading and care services. And so on and so on.

All of this worries watchdogs like Fitch Ratings and investment giants like Goldman Sachs somewhat. Not waving the red “danger” flag, as the trajectory of the money is clearly different from old-school bills, coins, and tender. It’s more of a be careful what you wish vibe.

On the plus side, Fitch analyst Tamma Febrian notes, getting on the crypto bandwagon could see trading and custody fees skyrocket over time. Banks could build competitive advantages and new customer bases in emerging service areas as science fiction becomes financial fact. It’s not as if the competitive threats posed by crypto and fintech startups in wholesale clearing, settlement, and cross-border payments are going to diminish.

Still, risks abound as crypto disruptions and regulatory responses advance faster than boardrooms can adapt. And in the case of market hedging and infrastructure, maybe not fast enough.

“Changes could increase compliance costs or limit existing/planned business activities, although tighter regulation will help contain financial and operational risks and provide more certainty to the potential crypto investors and users,” says Febrian. “Where banks have weaker risk controls, there may be greater potential for crypto exposure to expose them to legal risks, such as money laundering and terrorist financing.”

Furthermore, Febrian adds, “reputational risks could even stem from legitimate activities, for example when customers believe banks have tacitly endorsed crypto trades that subsequently go awry.”

There is one more thing to consider: the popular idea that increasing cryptocurrency adoption will lead to rising prices. Recent crypto asset sell-offs suggest that “mainstream adoption can be a double-edged sword,” argue Goldman strategists Zach Pandl and Isabella Rosenberg. “While it may increase valuations, it will also likely increase correlations with other financial market variables, reducing the diversification benefit of owning the asset class.”

This caveat goes against the conventional wisdom that cryptocurrencies are a solid tool for diversification. And it’s a lot more damaging than, say, the CEO of JP Morgan Chase Jamie Dimon Label cryptocurrencies as “scams” ​​and “worthless.” Or Warren Buffett, who called Bitcoin a “mirage” that “fails the test of a currency.”

It was easy for the crypto crowd to dismiss such naysayers as protests from analog-age thinkers. Yet Goldman’s critique pokes fun at crypto bulls who slam whatever happens inside it The right, making Bitcoin legal tender. Or whether Microsoft, Paypal or Starbucks accept.

More important revolutions are taking place at the world’s leading monetary authorities – from the People’s Bank of China in Beijing to the Federal Reserve in Washington. The PBOC is taking the lead in launching a central bank digital currency that the acronym-crazy crypto crowd is calling CBDCs. Fed chair Jerome Powell’s Fed is now moving in this direction.

Ten days ago, Powell’s team announced they were seriously looking into a digital dollar, a “fedcoin” if you will. The news came around the same time as markets realized that the long-held argument that crypto was a hedge against inflation was nonsense.

There is a great deal of debate as to whether an e-yuan or a fedcoin would either bolster or marginalize private crypto assets. In China, President Xi Jinping’s team has exposed its own prejudices by effectively banning crypto mining and trading.

And the Fed? Powell’s team is, well, cryptic about his intentions. But Bitcoin enthusiasts are aware that the Chairman Gary GenslerSEC’s team at the Securities and Exchange Commission could soon decide the future of crypto assets.

It’s hard not to tie the dots here to what North Korea is up to. One of the biggest concerns about crypto is how it makes life easier for money launderers, terrorist financiers, tax evaders, and hackers. Earlier this month, consulting firm Chainalysis made waves when it shut down Kim Jong Un’s army of hackers Grossed around $400 million of the cryptocurrency over the past year, a 40% increase over 2020.

Odds are much, much higher, the actual number. It allows Kim to fund his nuclear ambitions, fret about UN sanctions and shake off the yoke of Beijing’s influence. Gensler’s phone has to ring non-stop with frantic calls from the Treasury Department and national security bigwigs.

Anyhow, Goldman’s skepticism about normal cryptocurrency supply and demand dynamics should serve as a warning to Asia’s banks. Chances are the predictability they normally apply to assets and services will break down in other ways as well.

As of this writing, analyst Febrian notes, “We believe that recent crypto activity is unlikely to have a major short-term impact on the rating of Fitch-rated banks in Southeast Asia, but will continue to assess developments as they emerge.”

In the future, however, everything we think we know about official controls and compliance with them reduce risk– including know-your-customer procedures – is in the air. The same is true of rating agencies’ abilities to assess a bank’s risks to digital assets — and new ones as they arise as innovation accelerates.

Here’s Goldman’s concern that crypto assets may not follow similar laws of financial gravity as other stores of value, a sobering warning to Asian banks to tread very carefully.

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