Goldman’s Bitcoin Skepticism Warns Asian Banks

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A man wearing a mask stands next to a bus stop covered in a Bitcoin advertisement in Hong Kong.

Budrul Chukrut/SOPA Images/LightRocket via Getty Images

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

Whether it’s the fear of missing out or sober business decisions that are fueling the trend, several institutions are taking the plunge. This is especially the case in Southeast Asia, where Singapore’s DBS has established a crypto digital exchange platform.

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

All of this has watchdogs like Fitch Ratings and investment giants like Goldman Sachs a little apprehensive. Don’t wave the “danger” red flag given that the path of money is clearly away from old-fashioned bills, coins, and payment tools. It’s more of a “be careful what you wish for” vibe.

On the bright side, notes Fitch analyst Tamma Febrian, jumping on the crypto bandwagon could increase trading and custody fees over time. Banks could create competitive advantages and new customer bases in nascent service areas as science fiction becomes financial fact. It’s not as if 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 disruptions and regulatory responses move faster than executive suites can adapt. And in the case of backups and market infrastructures, maybe not fast enough.

“The changes could increase compliance costs or curb existing/planned business activity, though tighter regulation helps contain financial and operational risks, providing greater assurance to potential crypto investors and users,” says February. “Where banks have weaker risk controls, there may be greater potential for crypto engagement to expose them to legal risks, for example in relation to money laundering and terrorist financing.”

Moreover, adds Febrian, “reputational risks could arise even from legal activity, such as if customers perceive that banks have tacitly approved crypto transactions that then turn sour.”

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There is something else to consider: the widely shared idea that increased adoption of cryptocurrencies will result in higher prices. Recent crypto asset sales suggest that “widespread adoption can be a double-edged sword,” say Goldman strategists Zach Pandl and Isabella Rosenberg. “While this may increase valuations, it will also likely increase correlations to other financial market variables, thereby reducing the diversification benefit of holding the asset class.”

This caveat goes against the conventional wisdom that cryptocurrencies are a solid tool for diversification. And that’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 “fails the test of a currency.”

It was easy for the crypto crowd to dismiss such criticism as the protests of analog-age thinkers. Yet Goldman’s review pokes fun at the crypto bulls getting into whatever is happening in El Salvador, which made Bitcoin legal tender. Or if Microsoft, Paypal or Starbucks accept it.

Bigger revolutions are taking place in the world’s highest monetary authorities, from the People’s Bank of China in Beijing to the Federal Reserve in Washington. The PBOC is leading the rollout of a central bank digital currency, which the acronym-crazed crypto crowd calls CBDC. Now Fed Chairman Jerome Powell’s Fed is also pivoting in that direction.

Ten days ago, Powell’s team announced that they were seriously considering a digital dollar, a “Fedcoin,” if you will. The news came around the same time markets realized that the long-held argument that crypto is a hedge against inflation was wrong.

There is a big debate over whether an e-yuan or a Fedcoin would bolster private crypto assets or banish them. 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, well, enigmatic about its intentions. But Bitcoin enthusiasts are well aware that Chairman Gary Gensler’s team at the Securities and Exchange Commission may soon decide the future of crypto assets.

Here, it is difficult not to make the connection with what North Korea is doing. One of the biggest concerns about crypto is how it makes life easier for money launderers, terrorist financiers, tax evaders, and hackers. Earlier this month, consulting firm Chainalysis turned heads everywhere when it concluded that Kim Jong Un’s army of hackers brought in around $400 million worth of cryptocurrency last year, or an increase of 40% compared to 2020.

Chances are, the actual number much, much higher. This allows Kim to fund his nuclear ambitions, flout United Nations sanctions and shake off Beijing’s influence. Gensler’s phone must be ringing non-stop with panicked calls from the Treasury Department and National Security bigwigs.

Either way, Goldman’s skepticism about the normal supply and demand dynamics applying to cryptocurrencies should be a wake-up call for Asian banks. Chances are that the predictability they typically apply to assets and services breaks down in other ways as well.

At this time, analyst Febrian points out, “we believe that recent crypto activity is unlikely to have a major short-term impact on the ratings of Fitch-rated banks in Southeast Asia, but continue to ‘evaluate developments as they occur’.

Going forward, however, everything we think we know about regulatory controls and compliance to reduce risk, including know-your-customer procedures, is on hold. So too are the abilities of credit rating companies to assess the risks associated with a bank’s digital assets, and new ones as they emerge as innovation accelerates.

Here, Goldman’s concerns that crypto assets might not follow the same laws of financial gravity as other stores of value are a sobering warning for Asian banks to be very careful.

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