Chaotic bitcoin market seen as no obstacle to institutional pickup

It took an hour for bitcoin to plummet 18% the afternoon of May 19, just one of the dramatic intraday slides and spikes in a weekslong washout for the cryptocurrency that has erased more than $400 billion in market value.

Yet even as bitcoin continues to wobble around a 40% decline from its all-time high in April, banks, asset managers and other institutions have pressed ahead with bringing the cryptocurrency and other digital assets to their product suites. A bout of volatility — even a bear market as pronounced as the one that began earlier in May — is not likely to scare institutions away from finding ways to give customers access to cryptocurrencies, industry experts said.

"Institutions and investors were fully aware of the type of volatility they could see in this asset class," Compass Point analyst Michael Del Grosso said in an interview. "I would argue for certain institutional hedge funds and some asset managers, volatility like what we saw yesterday is a feature, not a drawback, of this asset class."

Cryptocurrency custody and trading may be approaching a tipping point in 2021. While consumer-facing apps like those of Coinbase Global Inc. have made retail trading accessible for several years, the past three months have seen big bank and asset manager executives explore or fully endorse the cryptocurrency market. The CFO of trust bank State Street Corp. said in April that firms like his would be essential for bringing credibility to the digital asset market, days after the Financial Times reported State Street would create a cryptocurrency trading desk. Bank of New York Mellon Corp. formed a digital asset custody and transfer unit in February. Within the past month, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. have all been reported to be building cryptocurrency services for some private banking or institutional clients. JPMorgan and Wells Fargo are exploring actively managed cryptocurrency funds they could offer to wealth management customers, while Citigroup is considering trading and custody services.

The explosion in cryptocurrency trading, marked by bitcoin's approximately 600% price gain from May 2020 to its peak in April, has also exposed weaknesses in the platforms that consumers and institutions alike are using to price and trade the assets. Most consumer bitcoin exposure to date has been concentrated among risk-ready retail traders willing to hold their cryptocurrency assets in separate virtual wallets at exchanges or brokerages. Coinbase alone represented 11.1% of the total market capitalization of all cryptocurrencies at Dec. 31, 2020, the company said in its S-1 filing in February.

Widespread outages at exchanges from Coinbase to Binance Holdings Ltd. coincided with bitcoin's precipitous drop on May 19, locking users out during the sell-off.

"We experienced unprecedented surge in trading volumes. My sincere personal apologies to every customer who faced challenges due to unreliability of our site/apps," Coinbase Chief Product Officer Surojit Chatterjee wrote on Twitter about the outage. "We're doing everything we can to make our system robust and be ready for the next time."

Building out the ranks of customer support staff and software developers throughout the cryptocurrency ecosystem will become more and more important as the number of people accessing the market grows, Del Grosso said.

"It's a problem of money and people: How many people do you put in your call centers, how many product engineers are you hiring to fix some of these issues," he said.

Still, episodes of volatility and the prospect of platform failures have not stopped consumers from jumping into the cryptocurrency market, and regional and community banks are picking up on their customers' growing interest. A January 2021 study conducted by the cryptocurrency trust company NYDIG Trust Co. LLC found that 80% of the more than 2,000 bitcoin holders surveyed would rather keep their digital currencies at their regular bank if it offered a form of secure storage. About 46 million Americans, or about 22% of the adult population, own bitcoin, according to NYDIG.

First Foundation Inc., a regional bank with about $7 billion in assets, announced April 20 it had invested in NYDIG with a plan to build the back-end technology that would allow First Foundation's bank customers to easily hold and trade bitcoin from within their online or mobile bank interface. First Foundation wants to roll the feature out in the fourth quarter, COO Lindsay Lawrence and CFO Kevin Thompson said in an interview. NYDIG will hold a customer's bitcoin in a separate account, but the balance and buy and sell orders would be available from the First Foundation platform, they said.

"Our thought process was that if we don't get engaged in this, we might be missing out on something later and then our clients are going to have to go elsewhere," Lawrence said.

But the bank will have to put considerable effort into educating its customers on what bitcoin exposure would mean for them, Thompson said.

"Our primary concern is the safety and soundness of our bank and safeguarding our clients' assets. We're doing a lot of work to understand regulatory compliance implications of having this type of asset showing up on a customer's account, and we need to make sure we have proper disclosures, warnings, education to ensure they understand the volatile nature and the stark difference between FDIC-insured assets in the bank," he said.

Thompson, who has followed the cryptocurrency market's development for years, believes the asset class will become less volatile as more and more people use it.

"As the adoption cycle continues, and processes improve and regulators get involved, I think the average customer will be very interested in being involved in these types of assets," he said.

Washington's current view of crypto-assets in the U.S. is inconsistent at best. Brian Brooks, who led the Office of the Comptroller of the Currency until January, signaled the regulator's openness to granting national bank charters to companies focused on digital asset custody. But on May 19 — the same day bitcoin fell sharply — Senate Banking Committee Chairman Sherrod Brown, D-Ohio, wrote to Brian's successor Michael Hsu with concerns that Brooks' OCC had awarded charters too freely.

"Given the many uncertainties present in the digital asset landscape as identified by other regulators, the volatility of digital asset valuations, and the disproportionate influence individuals can have on entire cryptocurrency markets, the OCC is not in a position to regulate these entities comparably to traditional banks," Brown wrote.

From within the diehard cryptocurrency space, broader access and exposure to bitcoin and other digital assets is expected to progress no matter how choppy the market gets.

"Crypto has suffered these washouts before, and always comes back strong," Mike Novogratz, the CEO of cryptocurrency asset management firm Galaxy Digital Holdings Ltd. said in a video message posted May 19. "The amount of human capital we see coming into the space is increasing, not decreasing, and I think that bodes well for the future."