Opportunities in the financial services industry with crypto assets have never been more promising than they are today. We are developing a series of blogs on crypto assets, with topics ranging from current market trends, to technological advancements, crypto asset-related regulation and integrating crypto asset offerings into banks’ portfolios. This is the first blog in this series; we hope you will enjoy reading it.
After a dramatic meltdown in the cryptocurrency sector in 2018 (known as ’Crypto Winter’), with bitcoin falling about 75% from its maximum value and the general token market capitalisation dropping by 80%, it is now springtime for crypto assets. The bitcoin exchange rate reached a historical peak recently and we are seeing huge growth in the crypto market, as shown in Figure 1.
Around the globe, announcements and media reports reveal growing interest in cryptocurrencies and crypto-based products and services. Citigroup for instance noted in a research brief on March 1, 2021 that bitcoin could one day “become the currency of choice for international trade”. Goldman Sachs has announced the launch of a new cryptocurrency trading desk despite pointing out that cryptocurrencies are not even an asset class, given that they do not generate any cash flow (unlike bonds) and are not a hedge against inflation. In March, J.P. Morgan announced that it plans to create more than 50 blockchain-related jobs to further develop its proprietary wholesale token, the JPM coin and facilitate transactions in their global corporate banking business.
Switzerland: Crypto asset innovator
In Switzerland, there has been frantic activity in several key areas. For example, the crypto broker Bitcoin Suisse is currently flooded with requests to open accounts and it has processing delays of up to six weeks. While the Tier 1 players are still hesitant to enter the market, we see significant interest and activity among the Tier 2 and Tier 3 private banks and also increasingly retail banks, which want primarily to offer their clients custody services and access to venues for direct investment in cryptocurrencies and crypto assets.
Figure 2 shows the growing set of products that enable clients to get market exposure, with dedicated cryptocurrency funds and structured products such as trackers and certificates.
Additionally, there is growing interest among asset and wealth managers, as well market infrastructure providers, to securitise not only bankable but also non-bankable assets, settle trades and facilitate payments. The SNB, BIS and SIX in parallel are evaluating the potential of settling tokenised assets in central bank money through the issuance of a new Central Bank Digital Currency (CBDC), the so-called ’Swiss Franc Stable coin’. We will look at this initiative in more detail in a later blog post.
From an international perspective, Switzerland can be considered an incubator for these technology-driven emerging business models and new asset class universe. One of the main drivers is the emergence of FinTech companies that adapt well to digital- and crypto-friendly regulation. There is a large and skilled FinTech community, with proximity to a strong and innovative financial industry. The numbers speak for themselves: 10% of all European FinTechs are based in Switzerland, of which 30% are operating in the field of Distributed Ledger Technology (DLT). There is a concentration of crypto companies in the ’crypto valley’ between Zug and Zurich, where (according to the IFZ FinTech Study) 250 companies already had or were planning to establish their headquarters by 2020.
A rising new asset class?
Critical voices may compare the current situation with the previous crypto rally that peaked in late 2017 and ended with the crypto winter in early 2018. However, there are strong signals indicating that today the situation is different, for the following reasons:
- Emerging marketplace: Crypto assets have now found their way into the agenda of the global investor community. The industry is beginning to see crypto assets as a promising way to diversify investment portfolios as well as a source of innovation (e.g., in decentralized finance).
- Maturing technology and market infrastructure: The underlying technology is maturing, and along with it there are developments in the market infrastructure across the entire value chain from issuance and distribution to trading and custody, as well as asset servicing.
- Evolving blockchain and crypto assets regulation: Worldwide, regulators are developing policies rapidly in order to control the dynamic market. For example, the National Council and Parliament in Switzerland recently passed legislation on DLT technology that paves the way for regulated blockchain-related business models.
However, several key questions remain to be answered. For example, there are concerns among investors about scalability and sustainability: according to a recent study by Cambridge University, Bitcoin’s electricity consumption is greater than Argentina’s. Other questions relate to the evolving regulatory regime on accounting, taxation, trust and security.
What should Swiss banks do?
In this highly dynamic market, a question naturally arises about how Swiss banks should position themselves. Should they enable or even actively advise clients to invest in cryptocurrencies and funds, or should they remain passive when it comes to advisory services?
We recommend a structured, risk aware and stepwise approach. To avoid missing out on this business opportunity banks should start monitoring the market − its potential as well as the risks. We also encourage banks to continue to experiment and incubate proof of concepts (PoCs), map the findings from PoCs into transformation plans, and test pilots for operational readiness. Carefully executed, these steps will foster agile innovation, ensure ongoing transformation, and finally enable Swiss banks to secure the profits from maturing new business models.
Conclusion and outlook
We are cautiously optimistic about the future success of DLT-enabled crypto asset innovations ’made in Switzerland’. In our opinion crypto assets are here to stay, despite the questions and challenges. Over the coming months, we will publish a series of blogs on topics such as the regulatory regime, risk considerations (in particular AML and KYC aspects) and about operationalising crypto asset offerings by banks. We hope you will enjoy reading them and we look forward to engaging with you further.
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