Wall Street will find ways to satisfy cryptocurrency envy

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A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in New York City, New York, United States, July 19, 2021. REUTERS / Andrew Kelly – RC2UNO93ID0I

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WASHINGTON, Jan.2 (Reuters Breakingviews) – Banks are preparing to enter the cryptocurrency craze in 2022. This empowers them to tackle a range of issues that differ from their core business, from dark regulation to a market that operates 24 hours a day, seven days a week read more. Struggles over profit and customers can also overshadow other risks.

The value of digital currencies in circulation has tripled to over $ 2 trillion since the start of 2020. Traditional US banks currently can’t trade such assets on their own, but their clients do and many bankers want, despite the skepticism of luminaries like JPMorgan (JPM. N) boss Jamie Dimon who dismissed bitcoin as “worthless” recently in October. Dimon’s bank, Goldman Sachs (GS.N), Morgan Stanley (MS.N) and others are helping wealth management clients gain exposure through crypto derivatives. Those trade on regulated exchanges, a step behind the underlying digital currencies. But this is little more than dabbling.

What would really open doors for the larger banks would be the regulatory nod to participate directly in the custody and trading of digital assets. Among other things, this would help prevent profitable hedge fund clients from going elsewhere for their cryptographic needs.

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But the banks, bound by the regulations, cannot predict where the watchdogs will end up. While the Federal Deposit Insurance Corp has expressed openness to greater exposure to cryptocurrencies, the Office of the Comptroller of the Currency seemed skeptical and the Securities and Exchange Commission has essentially promised a crackdown if it ends up in charge of cryptocurrencies.

Take bitcoin-backed loans, for example, an area that is being explored by several companies including Goldman. Banks need to know whether regulators will allow such products. Bankers also need to figure out how to structure them if they can’t directly own the collateral.

Always open crypto markets add another dimension. Banks are used to fixed stock trading hours, for example. Many securities transactions take time, sometimes days, to settle, while digital currencies work in seconds. Also, the point is that trades cannot be undone, even if there are mistakes. These features increase the importance of third-party digital custodians to help manage risk, and many of these entities are still neither regulated nor transparent.

These are known unknowns. An even greater danger could be unknown strangers. These range from the reliability of decentralized confirmation processes linked to cryptocurrencies to the risk of hacks or errors that cannot be corrected. Wall Street’s fear of getting lost shouldn’t overshadow the risks of getting in.

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(This is a Breakingviews forecast for 2022. To see more of our forecasts, click here.)

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Editing by Richard Beales and Amanda Gomez

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