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Demand for more regulation
Against this backdrop, calls for effective regulation are growing louder. For example, ECB President Christine Lagarde told the European Parliament’s Committee on Economic and Monetary Affairs in late November that regulating cryptocurrencies in the EU was an absolute necessity. Currently, “Markets in Crypto-Assets” (MiCA), a draft regulation from the EU Commission, is already on its way through the European Parliament. Before the Committee, Lagarde has now outlined the need for a MiCA II, which would further expand the scope of regulation and supervision.
Regulatory efforts are also gaining momentum in the United Kingdom. The UK government is apparently envisaging extensive powers for the Financial Conduct Authority (FCA) in the crypto sector and access restrictions to the UK market for foreign providers.
Too much risk, too little transparency
It should not be assumed, however, that the failure of major crypto companies last year already signals the end for the principle of blockchain-based cryptocurrencies. Rather, it seems that the insolvent crypto companies repeated some of the mistakes that also led to the 2008 financial crisis. The major crypto insolvencies are the result of a lack of oversight and transparency, poor risk management and too much unregulated centralization.
In addition to the lack of oversight, FTX was probably also doomed to failure as it had close ties with the hedge fund Alameda Research, which in turn meant investments in various companies. FTX’s own FTT token was held in large part by crypto exchange Binance, which eventually liquidated FTT-backed loans.
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Crypto is here to stay
Investors, at least, still seem interested in crypto assets and currencies. This should be even more true if the crypto investment partners are trustworthy and subject to meaningful regulation. A study by Visa titled “The Crypto Phenomenon: Consumer Attitudes & Usage”[1] from December 2021 found that 94 percent of the target group analyzed are aware of the crypto option. Of the 21 percent of active users of crypto investments, however, 87 percent would have liked crypto offerings from their bank even at that time.
As long as this demand exists, financial institutions would be well advised to address the issue. Otherwise, there is a risk of losing customers and assets. Especially since the Big Techs from Apple to Tesla continue to address crypto issues as well.
The bank as the ideal interface
Established financial institutions have good reason to continue their crypto projects. The current crisis in the crypto market is also an opportunity. From the investors’ perspective, a crypto offering from their own regulated bank solves several problems at once, as it bridges the gap between the security and convenience needs of investors. If a regulated financial institution acts as the custodian of crypto investments, investors have to worry far less about whether their wallet is kept safe.
Moreover, access to crypto assets can be made much easier, especially since investors are dealing with a convenient one-stop shop – be it for traditional assets or crypto assets. Investment advisors can educate them about risks and help them diversify their portfolios. And with a financial institution as the orchestrator of today’s and tomorrow’s crypto services, efficiency and convenience for customers will continue to increase. Custody of assets from the metaverse, staking, payments and even tokenizations can thus be sourced through a single, trusted partner. Despite the current crisis: for banks and asset managers, the crypto world still holds great potential.
