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Big banks name cryptocurrency as risk factor in annual filings

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Big banks name cryptocurrency as risk factor in annual filings

A handful of the biggest U.S. banks have, for the first time, included cryptocurrencies as a potential business risk in their annual filings.

Half of the six largest banks by market cap — Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan Chase & Co. — cited the potential risks of cryptocurrencies in their 2017 10-K filings. Citigroup Inc., Morgan Stanley and Wells Fargo & Co. did not mention the emerging technology.

Several legal experts said they were not surprised by the inclusion, and referred to the decision as a judgement call for each business.

"Goldman and [JPMorgan] have been more outspoken about the crypto markets and their roles in it," Chip MacDonald, lawyer at Jones Day, said in response to a question about why some banks included cryptocurrency risks while others did not.

In February, Goldman-backed mobile payments company Circle Internet Financial Ltd. acquired U.S.-based cryptocurrency exchange Poloniex LLC. JPMorgan Chairman and CEO Jamie Dimon has flip-flopped on his original position that Bitcoin is a fraud, saying in January that he regretted that statement and believes in the technology behind the digital currency.

Each bank needs to assess the materiality of the risks cryptocurrencies pose to their specific business, MacDonald said in an interview. Bank of America's, Goldman's and JPMorgan's filings included good forward-looking risk factors, he said, but cautioned against listing generic risks.

Another attorney said that companies sometimes search for risks to disclose, arguing that there is no downside to including more.

"They're throwing it in there at this point, which is why three of them didn't include it," John Gorman, a partner at Luse Gorman, said in an interview. "There's a certain element of kitchen sink approach to risk factors."

Even the three big banks that did reference cryptocurrency did so in very broad terms. Bank of America, for instance, said cryptocurrencies could limit its ability to track the movement of funds. The bank deemed cryptocurrencies "speculative or risky," but cited a potential risk that clients may choose to conduct business in these markets anyway.

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With the rise of cryptocurrency-related news coverage and continued commentary from various U.S. regulators, legal experts interviewed by S&P Global Market Intelligence were not surprised by the timing of these first references to potential risks. MacDonald said that most banks try to adjust risk factors in their 10-K filings and avoid changing them in quarterly filings throughout the year.

Morningstar analyst James Sinegal said the time frame is a critical factor to consider when thinking about potential risk. Longer term, the decentralization made possible by blockchain technology could be disruptive, he said in an interview, noting that the financial system in the U.S. right now is very centralized.

Furthermore, Sinegal said there is a possibility that, 10 to 20 years from now, there may be more than one viable currency accepted in the U.S. But the analyst said the financial industry moves "very, very slowly," adding that a near-term financial risk to these banks' business is unlikely.

"People are still walking into branches rather than banking on the Internet," he said about potential disruption. "The idea that they're going to move outside the financial system to this unregulated wild west, I don't see that happening anytime soon."

Three big banks, including two that listed cryptocurrencies as a risk factor in their 10-Ks, recently took action in the digital currency space. In February, Bank of America, Citi and JPMorgan halted the purchases of Bitcoin and other cryptocurrencies on their credit cards.