Crypto: Expanding the reach of traditional banking and asset management

By Mark Bruce, CEO of Britannia Financial Group

For investors, the old adage “no risk, no reward” holds true. Crypto is no exception. Despite widespread criticism over the past months as a result of the industry’s ongoing volatility, many high-net-worth individuals (HNWIs) still view crypto as a desirable investment opportunity, especially as part of a diversified portfolio. In fact, technology consulting company Capgemini found in their 2022 “World Wealth Report” that 71% of the 2,973 global HNWIs surveyed had invested in digital assets.

It’s clear that crypto isn’t going away. Despite the high-risk profile, for many investors the issue isn’t the asset itself, but rather it’s the immature financial ecosystem around it, which is greeted with scepticism and apprehension.

FTX – then the world’s third largest crypto exchange - collapsed at the end of last year, having filed for Chapter 11 bankruptcy protection and its founder, Sam Bankman-Fried, was charged with criminal fraud. The demand for crypto, coupled with hesitancy around immature crypto exchanges, has created an exciting new frontier for conventional banks and asset managers. These companies can tap into the crypto market by leveraging their reputations as trusted institutions, untainted by the perceived recklessness and inexperience of tech start-up exchanges such as FTX.

Seeing demand from investors, traditional firms have moved quickly to establish themselves in the space. Deloitte’s 2021 Global Blockchain Survey found that leaders at financial services institutions regard digital assets and blockchain technologies as a strategic priority. Asset managers at abrdn and BlackRock have already adopted cryptocurrency. While JP Morgan has taken on two cryptocurrency exchanges (Gemini and Coinbase) as banking customers.

Despite this, many traditional banks still hold a high degree of caution when it comes to crypto. A study from the Association of Certified Anti-Money Laundering Specialists found that nearly 63% of respondents perceive cryptocurrency as a risk rather than an opportunity.

The decentralised and volatile nature of crypto plays a significant part in this, as well as a lack of clarity around its relationship with the sector’s AML (anti-money laundering) and KYC (know your customer) best practice.

There are still, however, many vocal advocates for crypto and digital currencies generally – myself being one of them. This month, it was widely reported that the Bank of England and HM Treasury are exploring the creation of a UK central bank digital currency (CBDC) by 2030.

Given the sustained interest, as an industry we must now ask ourselves: “How do we seize the opportunity that crypto offers up?” “What practical steps can be taken to ensure we are offering clients competitive portfolios in the space, and thereby scale revenue?”

For Britannia Financial Group, and many of our peers, a solution has been found in the Bahamas. Thanks to its business-friendly but robust regulatory framework and investment into its digital economy infrastructure, many banks are now choosing to operate their crypto offering out of the island.

The effort and requirements to obtain regulatory approval in the Bahamas do seem to have become understandably more stringent. However, we still feel strongly that the region will continue to operate as an important crypto hub.

Given the current market dynamics in the jurisdiction there are headwinds to overcome. The challenge now lies in limiting and managing exposure to the risks of crypto whilst still providing clients with a desirable investment opportunity which yields good margins.

In order to not just survive, but thrive, traditional banks must always be led by their clients. With demand for a crypto offering unlikely to go away anytime soon, the onus is now on financial institutions to commit to the long-term future of the asset by continuing to professionalise the ecosystem around it.