Despite being considered a volatile asset with sometimes wild price fluctuations, cryptocurrency is growing in popularity and usage across North America, with Bitcoin and Ethereum being the most preferred among users. A recent survey by Coinbase shows that 20% of American adults currently own crypto in spite of the recent exchange failures and negative press relating to digital assets. And 13% of Canadians currently own crypto assets or crypto funds according to the 2022 study by Ontario Securities Commission. The results from the 2022 survey by Grayscale Investments and The Harris Poll revealed that many Americans view crypto as the path to a more equitable financial system. And 25% of the respondents say inflation and a challenging economic environment have made them more interested in cryptocurrencies.
The poll also found that crypto is the most popular investment tool among Americans aged 18-34; 20% of those young Americans want the ability to own crypto in their retirement accounts. This indicates that crypto is here to stay. It also signals a call to action to regulators to protect investors’ financial future with regulatory clarity and guidance.
Volatility for the Global Cryptocurrency Market
With crypto and digital assets going mainstream, the number of crypto-native companies has grown significantly over the years to meet the growing demand from both individual and institutional investors. However, 2022 has been one of the most tumultuous years with prices of major cryptocurrencies falling, crypto exchanges and companies, such as Celsius Network, Voyager Digital, Three Arrows Capital, FTX, BlockFi and Genesis filing for Chapter 11 bankruptcy, the collapse in value of TerraUSD and Luna stablecoins and tougher regulatory rules.
Within the span of a single year, the global cryptocurrency market cap dropped from its peak of $3 trillion in November 2021 to nearly $800 billion in November 2022, before climbing back to $1.1 trillion in February 2023. The last “crypto winter” happened in 2018, when the market value of Bitcoin plummeted 80% from its all-time high. These events indicate that, despite the widespread adoption of cryptocurrencies and digital assets in the past few years, it’s not an investment for the faint of heart.
As the waters became choppier in the fourth quarter of 2022, venture capital (VC) investment in crypto startups dropped to its lowest level since the fourth quarter of 2020, according to PitchBook data. Overall, crypto startups received $2.5 billion in funds from VC firms in Q4 2022, a 75% drop from Q4 2021, across 345 deals. This “crypto winter” has its domino effects on the industry and the setbacks, such as FTX’s very public implosion, which prompted many venture capitalists to pull back even further. As VC funds dry up and market volatility continues, digital asset firms, such as Coinbase, Blockchain.com, Kraken, Huobi, Silvergate Capital and ConsenSys, have embarked on several rounds of layoffs.
How Crypto Is Becoming a “Non-Risky” Asset Class
With the collapse of crypto-friendly banks like Silicon Valley Bank, Signature Bank and Silvergate Capital, many digital asset firms and tech start-ups are now hunting for new banking partners. High leverage and relatively low levels of liquidity, combined with layoffs, have led to significant uncertainty. However, despite these headwinds, opportunities, such as real asset tokenization, remain for crypto investors.
Interestingly, cryptocurrencies and stablecoins are no longer among the top 10 most-cited risks to financial stability, according to a Federal Reserve Bank of New York report. As a trusted regulatory framework is established and investors gain confidence, crypto is expected to become a relatively “non-risky” asset class in the foreseeable future. Blockchain innovations are already enabling new products and services ranging from digital-only assets to tokenization of real-world asset classes such as art, real estate, bonds, equities, commodities and VC funds.
Having emerged as a rapidly growing asset class with renewed interest among retail and institutional investors, digital assets – including cryptocurrencies, stablecoins, central bank digital currency (CBDC), non-fungible tokens (NTFs), utility tokens, security tokens, payment tokens and decentralized finance (DeFi) tokens – can help banks create new revenue streams and increase market share by providing access to cryptocurrency without geographic limitations. Banks with digital asset offerings gain from financial inclusion advantages and benefits, such as greater transaction speed and certainty, automation through smart contracts, enhanced security and the operational efficiencies that blockchain technology brings. Of course, the biggest win of all is the ability to attract new, typically younger customers keen to test the growing digital asset investment class.
Banks Are Entering Digital Asset and DeFi Markets
It is no surprise, then, that, despite the volatility of cryptocurrencies, many of the leading banks have been cautiously entering the digital asset and DeFi markets? With the entrance of new players, some of the traditional banks and financial institutions, card networks, remittance players and stock exchanges are catering to customers’ demand by launching crypto-related services and new digital assets, while others are investing in crypto start-ups.
The following are a few examples:
- Mastercard, Visa and American Express have a number of partnerships with digital asset companies, allowing banks and merchants in their network to offer crypto-related services and crypto reward cards. Mastercard’s new Crypto Source™ program enables banks to offer secure crypto trading to their customers.
- Large banks like JPMorgan Chase, Goldman Sachs and Bank of America have launched crypto trading desks, and wealth management firms, such as Morgan Stanley and Wells Fargo, provide access to crypto through their products and funds.
- Citi’s wealth management unit created a digital assets group to help customers invest in cryptocurrencies, stablecoins, NFTs and CBDCs.
- The JPM Coin digital currency is being used to support domestic and cross-border payments. Recently, JPMorgan Chase received regulatory approval for its new crypto wallet trademark, J.P. Morgan Wallet™ that includes crypto payment processing, electronic transfer of virtual currencies and exchange of virtual currencies.
- In addition, major banks and financial institutions, such as U.S. Bancorp, BlackRock, Fidelity Investments, State Street, JPMorgan Chase and BNY Mellon, support digital asset custody.
From trading and custody to payments, staking and lending offerings, banks and financial institutions are innovating and developing new capabilities to support multi-asset classes, including digital assets, and investing in or partnering with digital asset infrastructure providers, crypto custodians (or sub-custodians) and fintech firms. Such partnerships are being touted as a major step toward the widespread adoption of digital assets.
Although cryptocurrencies are highly volatile in nature, investors will be more confident investing in digital assets when traditional banks act as a secure gateway for crypto investments and protect their funds.
In our next article, we’ll explore specific opportunities for banks to engage in digital assets activities. ISG helps bank navigate the uncharted waters of cryptocurrencies and digital assets. Contact us to talk about the opportunities and risks.
Check out the next article in this four-part series about banks and digital assets here.
About the author
Owen Wheatley
What he does at ISG
To say Owen Wheatley comes prepared to work through your operational concerns and transformational needs is an understatement. As ISG’s Lead Partner of Banking and Financial Services, he treats his 25+ years of experience in this ever-evolving, customer-centric field as a replete lexicon of applicable knowledge, relevant learnings and potentially executable solutions. In doing so, he makes the ethereal and theoretical, actual and obtainable.
Past achievements for clients
Knowledge-sharing is second nature to Owen. He provides his clients with market insights and meaningful thought leadership and helps them understand what similar (or different) organizations in comparable situations have done regarding transformational change. Many of Owen’s clients have sought his expertise to strengthen their customer engagement on the digital front, enhance the employee experience to improve the customer one and navigate new ecosystems—like integrating emerging partnerships—endemic to the industry. He makes sure that untangling this complexity and harnessing your new relationships always lead to your number one goal: driving better results for your banking or financial institution. In fact, Owen:
- Led a consulting team to design a commercially groundbreaking and elaborate deal for one of the largest hedge funds in the world to reimagine its middle and back-office operations, lessen the bureaucratic demand on the front office and serve institutional clients better. The measures of success for this co-designed and collaborative project included defined stages of excellence and experience metrics, delivered in a commercial model which positions all parties for success.
- Managed a large team of advisors to provide market insight and an "outside-in" perspective to multiple major North American banks looking to transform their operations, including indirect auto lending, core banking, cheque processing and the entire cash ecosystem.
- Led a team of experts in helping to transform the HR technology and operations of a major European bank, including designing the right strategy, creating the roadmap and business case, selecting the right partners for a new ecosystem and ensuring expedited and effective implementation.
