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JPMorgan Chase now banking crypto exchanges is a big deal. It’s huge, really.
Crypto asset skeptics and enthusiasts alike were delighted Wall Street Journal article last month sharing the big news that JPMorgan Chase, America’s largest bank by total assets, worth $2.74 trillion, is now expanding its banking services to crypto-asset exchanges Coinbase and Gemini. So why all the noise and fanfare? This move by the global banking giant draws a line in the sand.
Two lines actually. Let me explain.
1. For once, Banks see an opportunity in banking business with cryptoassets
Cryptoassets are often described as inherently high risk and unviable for various reasons. Primarily, this is due to a perceived inability to effectively mitigate or manage the problems of cross-border money laundering, terrorist financing and sanctions. Also, crypto assets have built a reputation from headlines, which focus on illegal activities and criminal use for various nefarious activities and concealment of assets. Why should a bank take the risk?
But focusing solely on perceived risks means ignoring the cryptoasset’s impressive growth in market capitalization and potential business growth opportunities. The current market capitalization of the crypto-asset is over $272 billion. The tip of the iceberg. Bitcoin, as the first major crypto-asset, is among the top ten currencies currently used in the world, including fiat currencies such as the US dollar, sterling and the euro. Similarly, the cryptocurrency Ether is ranked among the world’s 25 most popular currencies in use, and is noted to be in wider circulation than the South African rand.1 That’s a big deal.
Assessing the spectacular growth of the cryptoasset market as a whole is one way to think about the need for banks to rethink their approach to cryptoassets. The second is to think about the ease of access to cryptoassets: it is on the rise. Five hundred billion dollars flow annually between banks and crypto exchanges. This contributes to indirect risks that banks may not even be aware of. The new personal finance apps available on our phone have cryptoassets as their core offering. Companies such as Revolut, Stripe and Robinhood are all user-friendly and catalysts of the banking digitization revolution. COVID-19 is now also playing a role in fast-tracking the digitization trend.
Despite the shaky beginnings of this new asset class and the emergence of an alternative open financial system, the acceleration of crypto-asset business at the bank level has been phenomenal.
Now enter JPMorgan. JPMorgan has identified a compelling opportunity to innovate and take bold action. They took a deliberate and strategic step into the complex world of crypto-asset banking. A wonderful and welcome development, not only for JPMorgan, but for the industry.
The message is clear: crypto-asset businesses are in fact profitable where incentives are strong enough, KYC controls are in place, and money laundering and terrorist financing risks are effectively managed and mitigated.
By extending banking services to crypto businesses like Coinbase and Gemini, JPMorgan has shown tremendous vision, technical adaptation and framework flexibility. This is a sign that they now have the necessary confidence and trust, as well as an established regulatory compliance architecture, to effectively manage the risks associated with the inclusion of crypto exchanges. It also suggests that banks recognize that cryptomarkets are here to stay. Now, more than ever, banks are well positioned to better understand and embrace cryptocurrencies instead of segmenting all cryptocurrencies as “bad” or high-risk.
2. Coordinated cryptoasset exchanges earn bankers’ trust
Of course, this is not a one-way street. It takes two to tango. Global banks are changing their outlooks and adjusting risk appetites to bring MSB crypto-asset businesses into the fold. This is also a testament to the extraordinary efforts crypto exchanges have put into designing and implementing comprehensive AML compliance programs.
Just look at Coinbase and Gemini who have been true leaders in accepting their regulatory obligations to first and foremost protect their customers, but also their business, from bad actors. Risk management has always been key to building confidence in emerging markets and alternative asset classes, with cryptoasset markets being no exception.
The industry as a whole has significantly improved compliance efficiency. In 2012, 35 percent of Bitcoin transactions were attributed to illicit transactions, while less than 1 percent are illicit in 2020.2 This is a significant reduction, which is partially attributed to the adoption of robust cryptocurrency compliance frameworks. Thanks to crypto exchanges raising the bar(er), crypto is no longer a dirty word.
The crypto market has matured significantly over the years and crypto companies make daily decisions related to the compliance regimes they apply to their business. Corporate crypto exchanges are adopting compliance and AML frameworks and building bank-level compliance and risk management control frameworks to better monitor, review and manage the inherently risky asset class. Crypto exchanges increasingly speak the same language as banks: accepting clients with a strict Know Your Customer (KYC) and Due Diligence (CDD) process. Engaging in transaction screening and monitoring, client risk segmentation, independent audits and staff training accordingly – essentially complying with all pillars of the Bank Secrecy Act. This gives banks comfort and is familiar to them.
Additional kudos to Gemini and Coinbase for using regulatory compliance to enable their business growth and development. While some businesses view compliance as a burden and a burden on their business, these two have clearly intertwined business growth with regulatory compliance, providing the coveted vote of confidence from a tier one financial institution. It is important that forward-thinking financial institutions build trust and confidence in cryptoasset service providers, as they are not that different from banks under the updated regulatory framework. We are also encouraged by other crypto companies following us.
There is recognition that not all crypto asset deals fall into the same ‘high risk’ category and that there are nuances to this landscape. Exchanges and banks can now equip themselves with tools to monitor, track and identify suspicious actors. The visibility of criminality has never been so clear and crisp.
Regulations and regulatory bodies have also matured globally. The FATF’s June 2019 crypto guidelines have also forced regulatory standards to evolve and expand, giving crypto businesses an incentive to strive for compliance with bank standards. With more clarity, specificity and nuance from regulators comes building trust and partnership between the public and private sectors – both fighting the good fight. Regulators provide straightforward and unquestionable guidance, including rules and examples of how a risk-based approach can and should be applied to cryptoassets.
As the guidelines and frameworks are operationally tested and practically implemented, more adjustments will no doubt be required. But the winds are positive: banks are ready to do business with cryptoassets, and businesses with cryptoassets are ready for banks.
Interested in learning more about banks and crypto-asset deals? Be sure to watch our on-demand webinar, “What Your Bank Wanted to Know About Crypto… But Was Afraid to Ask,” and subscribe to our blog below for more related content!
1. https://coinmarketcap.com/
2. Elliptic research: https://www.theblockcrypto.com/post/65238/illicit-bitcoin-transactions-remain-below-1-of-the-total-amount-says-elliptic
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