Sam Reynolds

<div id="highlights-block_60d63a5ed92ca" class="highlights">
 <ul>
 <li>With recent announcements from FIS and Fiserve, banks are working on integrating crypto right into their banking platforms</li>
 <li>Long warns that banks are not “set up” for trading such assets, citing long settlement times </li>
 </ul>
 
</div>



Banks are looking to integrate digital assets, giving customers a place to trade crypto without leaving for external exchanges, but one banking executive said that there’s some work to be done before they can be fully integrated.&nbsp;



“A traditional leveraged bank is now trading bitcoin, which settles in minutes without irreversibility. Banks’ operations and reconciliation processes are not set up for assets with such features (most banks still settle one-per-day). Add leverage to the mix and it may not end well,” Caitlin Long wrote in a <a href="https://www.linkedin.com/posts/caitlin-long-_spains-bbva-opens-bitcoin-trading-service-activity-6811665535839940608-Xgb0/" target="_blank" rel="noreferrer noopener">Linkedin note</a>. 



<a href="https://www.reuters.com/business/spains-bbva-opens-bitcoin-trading-service-clients-switzerland-2021-06-18/" target="_blank" rel="noreferrer noopener">Spain’s BBVA</a> recently announced that it was launching a bitcoin trading service for private banking clients in Switzerland. But this is only for the bank’s private clients; perhaps more interesting are the tie-ups between custodian and digital asset infrastructure provider NYDIG and <a href="https://cms.blockworks.co/fis-opens-bitcoin-floodgates-for-banks/" target="_blank" rel="noreferrer noopener">FIS</a> as well as <a href="https://cms.blockworks.co/nydig-and-fiserv-team-up-to-put-bitcoin-in-consumers-bank-accounts/" target="_blank" rel="noreferrer noopener">Fiserve</a> which sell infrastructure software that powers retail banks’ web portals.  



Long explained that this is a conflict between the front and back office. The front office traders are pushing to be able to trade the high volume assets citing client interest, but the back office — where all the plumbing and the pipes are — can’t quite keep up and isn’t ready for an asset that settles in minutes and can’t be reversed.&nbsp;



“Risk officers may not even understand all the plumbing intricacies of connecting crypto with fiat currency payment systems,” she continued in the Linkedin Note. “Back in 2016 I predicted that someday a [Globally systemically important bank] (G-SIB) would fail because it didn&#8217;t address all the plumbing problems posed by connecting crypto to fiat payment systems and by definition a G-SIB is leveraged, so mistakes are amplified.”



In a follow-up <a href="https://www.forbes.com/sites/caitlinlong/2021/06/24/bis-proposed-capital-requirements-for-cryptoassets-vital-move-but-theyre-too-low-for-bitcoin/?sh=535aa8f22546&amp;utm_source=TWITTER&amp;utm_medium=social&amp;utm_content=5043315218&amp;utm_campaign=sprinklrForbesCrypto" target="_blank" rel="noreferrer noopener">Forbes article</a>, Long explained that because of the faster settlement of bitcoin to a bank’s traditional accounts, “a bank could build an outsized bitcoin exposure and not even discover this until it&#8217;s overnight reconciliation.”



Long wrote that “central institutions can serve as lenders of last resort, that protect against settlement risks in traditional finance, don&#8217;t apply to bitcoin.” There is no liquidity for such a lender because it would be too hard to get, most of the bitcoin in circulation is being held away in wallets.&nbsp;



In a recent Blockworks webinar, David Mercer, the CEO of LMAX Group, <a href="https://cms.blockworks.co/building-the-plumbing-for-institutional-capital-markets/" target="_blank" rel="noreferrer noopener">identified the lack of ‘plumbing’</a> as a key concern preventing the widespread institutional adoption of digital assets. 



“There’s a lot of plumbing in capital markets. And the plumbing either is non-existent in crypto or it’s blocked,” Mercer said. “We’re going to need that B and C in the A-B-C to come into the market.”



Michael Sonnenshein, the CEO of Grayscale Investments, added during the same webinar that “not only is there no plumbing that connects to the legacy financial system, but the pipes aren’t even pointed in the right direction.”



However, Long argued that the infrastructure can be built. In her Forbes post, she said that there’s a safe way to do it which involves completing all transactions in a fenced off subsidiary, avoiding leverage, pre-fund all transactions, and building an IT system to update the settlement and reconciliation process for the irreversible nature of bitcoin.&nbsp;



“Getting this wrong could prove bad not only for the banking system’s solvency over time, but also for bitcoin markets by adding to bitcoin’s already high price volatility,” she concluded.

Avanti Group CEO: Bitcoin and Traditional Banks Might Not ‘End Well’

Casey Wagner

<div id="highlights-block_60b9356aea59b" class="highlights">
 <ul>
 <li>Bitcoin and other digital assets have fallen into a regulatory grey area </li>
 <li>The regulations that many fear will disrupt the current digital asset landscape are not actually all that difficult or unreasonable, according to Bryan Bishop, co-founder and CTO of Avanti Financial Group </li>
 </ul>
 
</div>


<div id="highlights-block_60b933feea59a" class="highlights">
 
</div>



Bitcoin 2021, Miami — While regulatory crackdowns on crypto may sound like nails on a chalkboard to some investors, experts insist that regulation is essential to advancing the asset class.&nbsp;



“The hardest problem in this space is figuring out how to wrap the crypto rails that we have created with a regulatory map,” said Bryan Bishop, co-founder and CTO of <a href="https://avantibank.com/" target="_blank" rel="noreferrer noopener">Avanti</a> Financial Group, during a panel discussion at the Bitcoin 2021 conference in Miami. “How do we start running everyday transactions in the crypto as part of the formally regulated banking and financial system? That is not a solved problem at all.”&nbsp;



<figure class="wp-block-image size-large is-style-default"><img loading="lazy" decoding="async" width="1024" height="734" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg" alt="Bitcoin 2021" class="wp-image-4548" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=2048 2048w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=359 359w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=364 364w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=306 306w, https://blockworks-co.imgix.net/wp-content/uploads/2021/06/Bitcoin-2021-regulatory-panel-story-1024x734.jpg?w=80 80w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>A panel on June 3, Whale Day, at Bitcoin 2021 in Miami.</figcaption></figure>



However, the regulations that many fear will disrupt the current digital asset landscape are not actually all that difficult or unreasonable, Bishop said.&nbsp;



“In my experience, regulation is actually not as hard to deal with as people seem to think,” he said&nbsp; “The folks who are overseeing regulated entities generally want you to be doing a number of totally reasonable things, like maintaining a long and thorough business continuity plan, which you probably should be doing anyway.”&nbsp;



Bitcoin and other digital assets have fallen into a regulatory grey area. With several different governing bodies, there is often confusion about which organization tackles which issue.&nbsp;



“A lot of folks think that the SEC is the regulator for crypto, but actually there are multiple different regulators in the US,” said Zach Dexter, CEO of LedgerX, during the panel. “The SEC generally handles the security side, and the CFTC generally handles the commodity derivative side — and bitcoin and ethereum are considered commodities.”&nbsp;



Regulations that may have seemed unheard of a few years ago are starting to become a reality. In May, the Treasury Department announced that any cryptocurrency transfer over $10,000 must be <a href="https://cms.blockworks.co/us-treasury-report-crypto-transfers-of-10000/" target="_blank" rel="noreferrer noopener">reported to the IRS</a>. Securities and Exchange Commission Chairman Gary <a href="https://cms.blockworks.co/sec-considering-new-trading-rules/" target="_blank" rel="noreferrer noopener">Gensler</a> put “bad crypto actors” on notice with a warning that regulations will start ramping up.&nbsp;



“Entering the space, you have to be prepared to operate within certain constraints,” Bishop said. “One of the first questions to ask is where are you actually going to operate, and who is going to be the regulator? Right now, for example, Wyoming has seemed more prepared on this front.”&nbsp;



The regulations though are all signs that the landscape is maturing, and ramped-up rules are going to be inevitable, Bishop said.&nbsp;



“There used to be a question about whether these companies could be regulated,” said Bishop. “Now, people are saying ‘of course it can be regulated,’ but that wasn’t always so obvious. It’s becoming quite clear that if the point is to continue to grow, it will be hard without that structure.” 



Read more of our coverage from Bitcoin 2021 <a href="https://cms.blockworks.co/?s=Bitcoin+2021" target="_blank" rel="noreferrer noopener">here</a>.