The Banking Industry Cashes in on the Crypto Craze
In the infancy stages of cryptocurrency development, banks were outwardly hostile towards digital currency. However, the widespread adoption of blockchain-based technology for processing financial transactions quicker, safer, and more efficiently has led to a rethinking of traditional thought processes among notable banking giants. A caveat is in order, however many banks remain opposed to the purchase of cryptocurrency with bank-issued credit cards.
Established banking institutions have policies in place proscribing the use of bank-issued credit cards for cryptocurrency purchases. For the most part, this practice is limited to US-based banking institutions. While crypto certainly has a large and growing fan base, it remains an extremely volatile asset class, and is not recommended as a store of value. Several high-profile incidents of theft from crypto exchanges over the years have not helped the cause; they have exacerbated the skepticism of established financial enterprises and the monetary authorities.
One need only examine the price fluctuations in Bitcoin, and altcoin over the course of 2018 and 2019 for indications of this asset class’ volatility. For example, Bitcoin was priced at $6700 per unit in September 2018, and was trading at around $8400 per unit in September 2019. In between, there have been dramatic price fluctuations, with the world’s #1 cryptocurrency dropping under $3500 per unit, before hitting highs of over $12,500 per unit in July 2019.
While banks and regulators eschew the dramatic volatility of BTC, it is this very feature that is so enticing to speculators, traders, and casual investors of this contrarian asset category. Such is the interest in crypto, that many individuals are now trading price movements via CFDs at established brokerages. CFD trading is derivatives trading where traders buy contracts on BTC and other cryptos based on expectations of future price movements This has facilitated greater public interest in Bitcoin and altcoin, and banks are now reassessing their approach to this lucrative industry.
Banks are Starting to Accept Bitcoin and Cryptocurrency
After the unprecedented bull run of 2017, the cryptocurrency market endured a tumultuous slide which saw gains whittled away, during a corrective phase. However, 2019 brought with it fresh new hope for the crypto market which in turn eased the negative perceptions held by banks and other established financial institutions. In recent years, credit card companies worked in consonance with banks to alter the merchant category code assigned to digital currency purchases. By doing so, extra fees vis-a-vis crypto purchases could be charged.
It was not altogether uncommon for interest-rates in the region of 23% – 25% to be charged as advance fees on top of crypto brokerage fees. Increased moves to regulate the crypto trading and investing industries have put in place a series of safeguards in the form of higher fees and commissions when cryptocurrency purchases are involved. That the IRS regards Bitcoin and other crypto as assets is notable in terms of how it is taxed. Even the Securities Exchange Commission (SEC) has imposed strict measures on how ICOs are offered – they are now legally perceived just like IPOs.
Despite increased scrutiny in the US, there are several leading US banks which accept transactions with cryptocurrency brokerages via credit card purchases. An estimated 30% of banks are not subject to these stringent requirements. Chief among them are Goldman Sachs which now has its own digital currency known as Circle. This cryptocurrency was created in the interests of generating price stability with virtual currency. Its value is not derived from the extremely volatile cryptocurrency market; it is pegged to the value of the USD. While this flies in the face of the raison d’être of crypto to begin with, it is nonetheless a hybrid system.
Citibank has been exploring the possibilities of blockchain-based technologies since 2015. The head of Citi Innovation Labs, Keen Moore boasts of at least 3 blockchains for the ‘concept’ virtual coin – Citicoin, which has since been scrapped. In much the same way as many other US-based banks, Citibank also banned account holders from purchasing crypto with their credit cards. US-based customers switched from credit cards to debit cards to continue buying and selling Bitcoin through Citibank. This banking institution is focusing its efforts on regulatory compliance to ensure that Digital Asset Receipts (DAR) will bolster prospects for the global digital currency market.
Other banks like USAA feature a mobile app which is linked to a leading cryptocurrency exchange for users to automatically buy and sell digital currency. Yet another bank is Simple Bank which works alongside many leading cryptocurrency exchanges and can be used for buying and selling crypto for trading, and investment. Simple Bank is expressly reserved for US-based account holders. And then there is JP Morgan – a major US financial powerhouse which announced in February 2019 that it has a bank-backed cryptocurrency. Known as the JPM Coin, this digital currency can be used for settling transactions. JP Morgan is a notable entry to the banking scene which supports crypto-based trading.
Banks recognize that blockchain technology is the only way to compete with the security, speed, and reliability of smart contracts. For this reason, JPMorgan is now deeply invested in blockchain projects with distributed ledger technology. It is somewhat ironic that JPMorgan’s Jamie Dimon was outwardly hostile towards Bitcoin in earlier years, but has now embraced the blockchain technology that underpins it. The bank maintains that the CEO’s sentiment is consistent with the Board of Directors: Regulated blockchain technology holds promise.
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Guest Author, Khareem Sudlow