It’s no stretch of the imagination to expect that you will soon be able to buy and sell bitcoin through your local bank.
Bitcoin, ethereum and other cryptocurrencies are usually traded in SA through exchanges such as Luno and Ice3x, but their spectacular rise through 2017 means they have become too mainstream for banks to ignore.
Offering virtual-currency broking services would be one way for financial institutions to ensure they are not usurped by the burgeoning shadow banking system. Innovative banks in other parts of the world are already testing the waters. Last year, Switzerland’s Falcon Private Bank said it would provide "blockchain asset management solutions" for its clients, allowing them to exchange and hold cryptocurrencies.
Local financial institutions — which punch above their weight when it comes to innovation — are no doubt considering their options.
"Banks getting involved is inevitable, and good for the crypto space — it should raise the bar on KYC [know your customer] type issues," says Paul Mitchell, fintech and blockchain lead at PwC SA.
Cryptocurrency broking services by financial institutions "could definitely work", he says.
"I’d be surprised if banks and progressive asset managers aren’t already looking at it."
This is partly because financial institutions are increasingly treating cryptocurrencies as a legitimate asset class. And being uncorrelated to other types of investments, and highly volatile, digital coin trading is attractive to some types of investors.
Anthony Grant, CEO of FNB Foreign Exchange, says more and more clients are asking the bank for information about cryptocurrencies and trading options.
FNB has been "carefully assessing the opportunities" and will only pursue "sustainable solutions" that will benefit clients. The bank has not made a decision to facilitate cryptocurrency trades between clients, according to Grant, who adds that FNB is keeping an eye on the regulatory environment and is providing input to industry bodies.
According to Mitchell, another way for banks to wade in would be to add digital coins to their banking apps, since wealthy clients might want their cryptocurrency holdings to be included in their aggregated portfolios.
US-based Fidelity Investments started offering this service to its clients last year through a partnership with digital currency exchange Coinbase.
Banks could also act as custodians. "People are bad at managing private keys [secret codes], so they might prefer to pay their bank to do it for them. If they don’t, others will provide this service, and banks will lose out," Mitchell says.
Hans Zachar, MD of technology strategy at Accenture, says many banks are already starting to look at how they could use blockchain to transport money between two parties.
Blockchain is the technology that underpins cryptocurrencies and the recording of transactions.
According to Zachar, one of the biggest opportunities for banks is using blockchain to facilitate cross-border payments, as this would allow customers to move funds instantaneously. Using cryptocurrencies would also partially mitigate fiat-currency liquidity risks for banks. But the banks would then need to maintain funds in this highly volatile asset class.
"The question is whether central banks would allow banks to become brokers of cryptocurrencies, either within the country or without. The reality is that right now, very few central banks and countries have actually taken a position on it," Zachar says.
The appeal of cross-border cryptocurrency transactions would likely be diminished if central banks step in to monitor and approve international payments, as this would slow the system down (unless central banks can process transactions almost in real time).
Meanwhile, Zachar says, the emergence of a shadow banking system, where people transact between themselves without a banking intermediary, is a real possibility — particularly if cryptocurrency prices stabilise of their own accord or as monetary authorities move to regulate the industry. "It’s something that will worry the formal banking system and the central banking system."
Even though some countries are clamping down on cryptocurrencies, analysts say it is too late to put the genie back in the bottle.
It seems logical then that banks need to embrace cryptocurrencies. Doing so, however, would be somewhat ironic, considering that part of the appeal of digital coins is that they challenge fiat currencies and the traditional, closely regulated banking system.
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