Crypto fear: An opportunity for banks
FTX’s collapse was the latest and possibly biggest blow to the crypto industry, pushing the crypto space further downwards into a deep bear market since December 2021. Whilst the price of BTC has fallen significantly, it has not collapsed completely, indicating that investors retain faith in the fundamental concepts behind digital assets, crypto currencies and blockchains.
The current downturn in valuations has not affected the rationale behind embracing crypto as an asset, and in fact provides an investment opportunity for major financial entities at a low risk/reward ratio scenario, capturing operational synergies and preparing for a potential bull run development with the next BTC halving. Now may be an opportunity for those willing to swim against mainstream tides, the technology behind the industry has not changed and if anything has kept developing, with financial entities specifically, seeing their particular business case unaffected by recent events.
Traditional Finance can attempt to capture market share based on three levers their crypto counterparts do not possess: an established and exploitable customer base, a robust regulatory environment against internal and external fraud, and a perception of trustworthiness across the space.
Existing Customer Base
- Traditional Finance already has existing data analytics processes in place to exploit cross-selling amongst its established customer base
- Retail has been undisturbed during the downfall, with BTC held by retail soaring to a record 17% in 2022.
- Institutional clients are developing as an emerging pillar in crypto, with 62% of investors increasing their exposure in the past 12 months, leveraging hedging and diversification opportunities
Robust Regulatory Environment
- Unlike Crypto natives (who operate in naive jurisdictions such as the Bahamas), traditional finance has strict regulatory requirements driven by the SEC and ECB
- Basel III reforms establish clear requirements with regards to credit risk and asset provisioning to prevent counterparty default risk issues
- CET1 & CRR provisioning, introduced after the 2008 crisis, guarantee sufficient provisioning of financial institutions against liquidity risk, avoiding the freezing withdrawals announcements common among the crypto industry
Trust
- Capital provisioning and quick central bank intervention during COVID19 have reinforced retail trust in the financial industry, preventing an economic collapse when the pandemic hit
- With regards to data and cyber, financial institutions are more prepared than emerging fintechs, and as such consumer sentiment is superior among traditional finance relative to crypto natives
