Goldman’s Bitcoin Skepticism Is Warning To Asian Banks

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

Whether it’s fear of missing out or sober business decisions driving the trend, several institutions are taking the plunge. That’s particularly so in Southeast Asia, where Singapore’s DBS established a crypto Digital Exchange platform.

In Thailand, Siam Commercial Bank grabbed a 51% stake in cryptocurrency trader BitKub. More recently, Union Bank of the Philippines plans to provide crypto trading and custodial services. And so on, and so on.

All this has watchdogs like Fitch Ratings worried and investment giants like Goldman Sachs a bit worried. Not waving the red “danger” flag given that the trajectory of money is clearly away from notes, coins and old-school payment tools. It’s more of a be-careful-what-you-wish-for vibe.

On the bright side, notes Fitch analyst Tamma Febrian, getting on the crypto bandwagon could boost trading and custodial fees over time. Banks could build competitive advantages and new customer bases in nascent service fields as science fiction becomes financial fact. It’s not like the competitive threats posed by crypto technologies and fintech startups in wholesale clearing, settlement and cross-border payments will diminish.

Yet risks abound as crypto disruption and regulatory responses move faster than executive suites can adapt. And in the case of market safeguards and infrastructure, perhaps not fast enough.

“Changes could raise compliance costs or curb existing/planned business activity, even as tighter regulation helps to contain financial and operating risks, providing greater assurance to potential crypto investors and users,” Febrian says. “Where banks have weaker risk controls, there may be a greater potential for crypto engagement to expose them to legal risks, for example around money laundering and terrorism financing.”

What’s more, Febrian adds, “reputational risks could stem even from activity that is legal, for example if customers perceive banks have tacitly endorsed crypto trades that subsequently turn sour.”

There’s something else to consider: the widely shared idea that increased adoption of cryptocurrencies will translate into rising prices. Recent selloffs of crypto assets suggest “mainstream adoption can be a double-edged sword,” argue Goldman strategists Zach Pandl and Isabella Rosenberg. “While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”

This caveat flies in the face of the conventional wisdom that cryptocurrencies are a solid tool for diversification. And it’s far more damaging than, say, JP Morgan Chase CEO Jamie Dimon calling cryptocurrencies a “fraud” and “worthless.” Or Warren Buffett, who called Bitcoin a “mirage” that “doesn’t meet the test of a currency.”

It’s been easy for the crypto crowd to dismiss such naysaying as the protestations of analog-age thinkers. Yet Goldman’s critique makes a mockery of crypto bulls teeing off anything happening in El Salvador, which made Bitcoin legal tender. Or whether Microsoft, Paypal or Starbucks accept it.

More important revolutions are taking place at the globe’s top monetary authorities—from the People’s Bank of China in Beijing to the Federal Reserve in Washington. The PBOC has the lead in rolling out a central bank digital currency, which the acronym-crazed crypto crowd calls CBDC’s. Now, Fed Chairman Jerome Powell’s Fed is pivoting in that direction, too.

Ten days ago, Powell’s team announced it’s seriously examining a digital dollar, a “Fedcoin,” if you will. The news dropped around the same time markets were realizing the long-held argument that crypto is a hedge against inflation was bunk.

There’s a big debate over whether an e-yuan or a Fedcoin would either fortify private crypto assets or banish them to the sidelines. In China, President Xi Jinping’s team has made its own biases known by effectively banning crypto mining and trading. 

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

Here, it’s hard not to connect the dots to what North Korea is up to. One of the biggest concerns about crypto is how it makes life easy for money launderers, terror financiers, tax evaders and hackers. Earlier this month, advisory firm Chainalysis turned heads everywhere when it concluded Kim Jong Un’s hacker army netted about $400 million of cryptocurrency last year, a 40% increase from 2020.

Odds are, the real number of much, much higher. It allows Kim to fund his nuclear ambitions, thump his nose at United Nations sanctions and throw off the yoke of Beijing’s influence. Gensler’s phone has to be ringing off the hook with panicked calls from Treasury Department and national security bigwigs.

Either way, Goldman’s skepticism about the normal supply-and-demand dynamics applying to cryptocurrencies should be a warning to Asia’s banks. Odds are, the predictability they typically apply to assets and services will break down in other ways, too.

As of now, analyst Febrian points out, “we believe recent crypto activity is unlikely to have major near-term rating repercussions for Fitch-rated banks in Southeast Asia, but continue to assess developments as they arise.”

Going forward, though, everything we think we know about regulatory controls and compliance to reduce risk—including know-your-customer procedures—is up in the air. So are credit rating companies’ abilities to gauge a bank’s digital asset risks—and new ones as they emerge as innovation accelerates.

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