Most banks traditionally are giving cryptocurrencies a wide berth, preferring the motto “To blockchain yes; to cryptocurrency, no.” “It’s extremely challenging. The legalized cannabis industry are having a much easier time than our cryptocurrency clients,” said Joe Ciccolo, president of the BitAML compliance service provider. But while many giants have “matured” only for the introduction of blockchain platforms, some players are not afraid to declare gentle relationships with crypto projects.
On November 30, during the BlockFS conference in New York, Silvergate Bank CEO Alan Lane recalled the long way Silvergate came through the crypto market. Lane himself bought Bitcoins in 2013 and at that time, his small bank, located in San Diego, California, accepted the first crypto client, a cryptocurrency exchange, which was a very bold step for a financial institution.
“Here were these companies that were raising money from reputable [venture capital] firms. They weren’t doing anything illegal, they weren’t doing anything immoral. And yet, they were struggling to maintain bank accounts. So I put our need for deposits together with their need for banking services,” said Lane.
Today, Silvergate is one of the leading banks for American crypto startups. Over the years, Silvergate has narrowed its focus almost exclusively to the service of cryptocurrency exchanges, OTC platforms, and institutional investors. Its clients include Coinbase, Gemini, Kraken, and bitFlyer. In a report submitted on November 16 to the SEC, the bank reported that it was then working with 483 crypto startups, whose deposits as of Q3 2018 were about $1.7 billion.
At the same time, Lane notes that the bank is extremely transparent in regulatory matters and obliges the CEOs of crypto exchanges to meet directly with bank regulators. Lane says that even at the early stages, he worked only with those startups that included legal expertise specialists from traditional finance who were responsible for compliance. “The Compliance Director is not a multi-tasking person,” says Lane, noting that at that time, the CEOs of many crypto startups performed almost all the functions that generally should be distributed to other team members.
The ability to track transactions on the blockchain allows Silvergate not to fear for involvement in illegal operations, often associated with cryptocurrencies. At an early stage, the bank introduced a monitoring system that linked deposits made with the Bitcoin blockchain data. A bank employee has the right to make quarterly inspections of exchanges, coming to their office and checking that they are maintaining a proper tracking system. “We wanted to be able to see both sides of that [Bitcoin] transaction. When you wire $50,000, send us the blockchain address […] what we want to see on the blockchain is a transaction that matches up with that $50,000 value,” says Lane.
To create more customer-oriented communication and remain competitive, Silvergate is integrated into the exchanges’ APIs in such a way that institutional investors can trade or deposit instantly 24 hours a day. It is attractive for urgent withdrawals in fiat, which, as noted by Lane, is essential in the case of a hack of an exchange.
Investors will be able to open long and short positions using so-called return swaps, and the bank will charge a spread for each transaction. According to the source, Morgan Stanley is not going to trade Bitcoin directly—swaps will be tied to Bitcoin futures contracts. Earlier this year, Morgan Stanley CEO James Gorman did say that the bank would not allow clients to trade cryptocurrencies directly, but would create a trading platform supporting various derivatives tied to digital assets.
In June, Morgan Stanley hired Andrew Peel to be the head of the digital asset markets (previously Peel worked at Credit Suisse Group AG as a derivatives trader, and from 2016, he had been serving as vice president of sales and trading innovations, including cryptocurrency).
According to a Bloomberg source, from a technical point of view, the bank is ready for swap trading and will launch it with sufficient interest from institutional clients after completing the internal process of approving a new type of transaction. The bank has yet neither confirmed nor denied the information received from Bloomberg.
Morgan Stanley also contributed to the research and analysis of the cryptocurrency market. The report, entitled “Bitcoin Decrypted: Fast Learning and Application,” released by the Morgan Stanley Research Department on October 31, shows that institutional clients are becoming more interested in cryptocurrencies, while interest from private traders is falling.
According to the document, the volume of cryptocurrency assets under the management of venture capital firms, hedge funds, and private equity companies has gradually increased since the beginning of 2016 and today amounts to $7.11 billion.
The report analyzed the cryptocurrency market over the past six months. Particular attention was paid to Bitcoin, as the researchers believe that it has “improved and solved its problems.” Dr. Zeynep Gurguc, a researcher at Imperial College London, believes that Bitcoin can become a medium of exchange in the next decade while noting that the first cryptocurrency still needs to solve problems related to scalability, regulation, volatility, and privacy.
The researchers also analyzed the stablecoin niche, noting that the growth of such projects began at the end of 2017 and increased during this year. One of the observations of scientists suggests that today’s fall of the crypto market has led to an increase in the share of Bitcoin in the volume of trading paired with the leading Tether stablecoin. At the same time, scientists believe that not all stablecoins will survive in the long term, and those with lower transaction costs, higher liquidity, and a transparent regulatory structure have the advantage.
Sberbank is related to those who are cautious in building relationships with the crypto market and are on the path to implementing blockchain platforms. On December 1, Cointelegraph reported that Sberbank and the investment company Interros carried out a blockchain transaction, which was no longer the first for Sberbank. Companies closed a so-called over-the-counter foreign exchange repo transaction, which is a sale of securities with an obligation to repurchase at a pre-determined price.
Vice President of Sberbank, Head of Global Markets Department, Andrey Shemetov, said that it was “a currency repo on the security of Eurobonds of a first-tier Russian issuer [it includes companies with the most successfully traded stocks.]”
The agreements were entered into the blockchain platform of Sberbank based on Hyperledger Fabric using smart contracts and digital signatures. The volume of the transaction was not disclosed, but Shemetov approximately estimated the amount as corresponding to the average volume of the inter-dealer repo transaction. He noted that the deal was not a test, but a real financial contract.
According to Shemetov, the conclusion of repo transactions on the blockchain has a number of advantages compared to traditional over-the-counter transactions. The blockchain allows you to monitor real-time market conditions of a transaction, audit data on a bilateral basis, and automate settlement and operational functions such as interest payments, margin call, clearing, and repository.
“In the future, the conclusion of transactions through the blockchain platform will reduce transaction costs and errors through automation, as well as increase transparency and trust among all participants in the financial market,” said Shemetov, suggesting that Sberbank might put such transactions on the flow.
Another speaker at BlockFS was Nick Rosenberg, director of information technology at Metropolitan Bank in New York. He said that Metropolitan was also looking for cooperation with a wide range of crypto startups (in particular, Coinbase is among the bank’s crypto clients).
“We’re certainly very interested in growing this vertical. We’ve learned that it’s a serious industry. There are some very smart people involved. There are some very interesting ideas coming out that could really change the way people do business,” Rosenberg said this summer in a conversation with Coindesk. At the moment, the Metropolitan is already working with crypto companies, providing the service of fiat deposits.
In a report to investors, the bank said that in the first quarter of 2018, commissions on transactions related to crypto clients amounted to $3.4 million. This increased the non-interest income of the bank by 300% compared with last year.
On October 15, financial service provider Fidelity Investments announced that it was launching the Fidelity Digital Asset Services platform for cryptocurrency trading and storage. The platform will be available for corporate clients.
Fidelity plans to create a “scalable infrastructure” that will draw on the company’s experience in creating such platforms in the traditional sector. During the launch phase, the platform will provide “institutional-level storage” and access to trading and “specialized customer service.” It is known that at the early stage, Bitcoin and Ether will be accepted for storage, as well as a number of other cryptocurrencies, which will be announced later.
Security will be provided through cold storage and “multi-level physical and cyber control.”
The CEO and chairman of Fidelity Investments, Abigail Johnson, noted that the goal of the new platform is “to make native digital assets, such as Bitcoin, more accessible to investors.” “Those efforts have been successful in helping us understand and advance our thinking around cryptocurrencies […] The creation of Fidelity Digital Assets is the first step in a long-term vision to create a full-service enterprise-grade platform for digital assets. In our conversations with institutions, they tell us that to engage with digital assets in a meaningful way, they need a trusted platform provider to enter this space. These institutions require a sophisticated level of service and security, equal to the experience they’re used to when trading stocks or bonds,” said the head of the new division, Tom Jessup.
State Street, one of the largest repositories for institutional investors, notes that customers are still not in a hurry to “deposit” their crypto assets, but there is an interest in digital assets. “There is no sense of urgency on the part of our clients to move into these assets right now. When they do, we want to meet them there. But when they do, we want to meet them there […] There is a very high level of interest but no need to move because currently none of our clients are looking for us to house these assets in custody […] We do talk to our clients who are interested in doing this and we are looking at this very closely. But we are not putting a sign that we are opening for business. That said, we are a blockchain-friendly firm; we are very involved in the vertical,” said Jay Biancamano, Managing Director of State Street for Digital Product Development and Innovation, at BlockFS conference.
Biancamano also spoke of the SEC position, saying that the commission calls on traditional providers to better understand the current state of affairs, and called it “refreshing.” “It’s not just about current cryptocurrencies, but also about tokenization and digitalization of traditional assets,” said Biancamano.
Traditional financial companies that provide (or are preparing to provide) cryptocurrency storage services also include the American holding Northern Trust, the Japanese bank Nomura, the Canadian VersaBank, and the Australian Guardian Vaults repository.