Asian banks’ crypto-asset surge calls for harmonized regulations in all markets

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Asian banks’ recent foray into blockchain-backed digital assets may require a concerted regulatory approach to protect lenders and their clients from the opacity and volatility of crypto products, experts say.

Singaporean company DBS Group Holdings Ltd. recently created a digital exchange and launched an initial offering of tokenized digital securities. South Korea’s Woori Bank, Shinhan Bank, NongHyup Bank and KB Kookmin Bank have also reportedly set up custodial services for crypto assets.

Consistent regulations across the region would allow clients in different markets to have access to the same asset class and similar trading mechanisms, which will improve liquidity, said Andrew Gilder, leader in banking and capital markets in Asia-Pacific at Ernst & Young. “If you have more liquidity, you have better confidence, price, transparency, less volatility. It makes the market a bit more stable,” Gilder said.

Cryptoassets are issued and transferred using blockchain or distributed ledger technology, their most well-known manifestation being cryptocurrencies such as bitcoin. But they can also take the form of a token that represents underlying assets that are not crypto in nature.

Prudent regulators

Many regulators, as well as banks, have been cautious about approving cryptoassets, as the market often equates them with cryptocurrency and its volatile and opaque nature. Fears surrounding cryptocurrencies include extreme price swings, higher risk of default, and even money laundering. For example, HSBC Holdings PLC has stated that it does not intend to offer cryptocurrencies as an asset class to its clients. On the other hand, growing customer demand and the wide application of blockchain technology in financial services has led several global banks such as JPMorgan Chase & Co. and The Goldman Sachs Group Inc. to announce crypto-based products. currencies.

While geographic diversities in Asia-Pacific make regulatory regimes fragmented, the region could draw inspiration from the European Union, which seeks to combat cryptocurrency volatility by bringing markets together to create larger pools of liquidity. . In September 2020, the EU announced plans for rules allowing faster and cheaper cross-border payments via blockchain and cryptoassets by 2024. Potential systemic risks from exposure to cryptoassets have prompted the Basel Committee on Banking Supervision on June 10 to propose new capital rules to ensure lenders have sufficient buffer against losses.

“Banks don’t necessarily want to hold crypto on their balance sheets … they just want to make crypto offerings available to their customers, but [the Basel Committee’s rules proposal] always underlines this narrative that crypto is a very risky commodity, it should be treated with caution, ”Gilder said.

The price of bitcoin has fallen 48.44% in recent months, but is up almost 250% from a year ago on July 16, according to the S&P Bitcoin Index. The S&P Cryptocurrency MegaCap Index, which covers the two most popular cryptocurrencies, bitcoin and ether from the ethereum network, has also shown volatility that is beyond what most banks can be comfortable with.

Early risers

Still, the first moves in the crypto-asset space could benefit banks as they could develop in-house know-how in blockchain-based processes ahead of their competitors and be seen as a leader in this emerging field, Hagen said. Rooke, a financial and fintech regulator. legal counsel to Reed Smith, an international law firm. “It puts [a bank] prominently for other types of tokenized offerings in the future. “

Regulators’ approval of crypto products could also bring virtual assets into the institutional fold, Rooke said.

Singapore Exchange Ltd. took a 10% stake in the digital stock exchange of the DBS group. The bank priced a $ 15 million digital bond security token offering on May 31 through its digital asset exchange and declared $ 80 million of digital assets in custody, with transaction volumes from $ 30 million to $ 40 million per day.

Standard Chartered PLC recently said it has partnered with a blockchain-based asset company to establish a virtual asset brokerage and exchange platform. The lender’s digital asset plans are subject to the possibility of creating a secure and compliant infrastructure to support the “inevitable and growing adoption” of digital assets by institutional investors, said Alex Manson, who heads the business unit. Singapore-based lender SC lender SC investment in innovation and financial technology. Adventures.

“It’s clear to us that ignoring this space is not the way forward for us,” Manson said. “It all depends on customer needs. We want to capitalize on accelerating the institutional adoption of the asset class … from where we think most of the initial demand will come from. “

For these banks, profitability may not yet be the primary focus of setting up their crypto-asset frameworks, said Mriganka Pattnaik, CEO and co-founder of Merkle Science, a monitoring platform and blockchain-based survey, based in Singapore. “For banks, setting up a digital asset infrastructure is really the first step in creating innovative ways to deliver new products,” said Pattnaik.

Although DBS and StanChart have limited their crypto-asset services to institutional and accredited investors, it is “safe to say” that each bank assesses how to provide its clients with a level of crypto-asset exposure consistent with risk tolerance. lenders. said Pattnaik.

As of July 20, US $ 1 was equivalent to S $ 1.37.

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