SECTOR REPORT: CRYPTOCURRENCY IN BANKING
Southeast Asian banks’ growing crypto exposure threatens earnings
Banks looking to dabble in crypto face operational, reputational, and legal risks.
T
he interest of banks in Southeast Asia (SEA) to develop cryptocurrency financial services are unlikely to affect banks’ credit profiles in the near term, but earnings opportunities and risks could grow over time depending on developments in their markets, particularly regulation-wise. In a report, Fitch Ratings notes that more banks in the region will likely make moves to establish a foothold in the crypto sector in 2022. Most recently, the UnionBank of the Philippines reportedly planned to offer trading and custodial services for cryptocurrencies. UnionBank also recently joined a sandbox to develop use cases for central bank digital currencies (CBDC). Other banks have also begun dabbling in cryptocurrency outside their main banking businesses. Singapore’s DBS Bank has, for example, established a wholly-owned cryptocurrency digital exchange platform called DDEx. Meanwhile, Thailand’s Siam Commercial Bank, through its SCB Securities unit, has acquired a 51% stake in a Thai cryptocurrency trader, BitKub, in November 2021. These banks are expected to try to curb risks through a series of measures, such as limiting access to accredited institutional investors, dealing only in better-established digital assets, and clearly segregating custodian accounts from trading wallets, the ratings agency noted in a recent report. It is not just banks that are interested in the potential surrounding crypto. A recent survey by EY found that one in four fund managers expect their exposure to cryptocurrencies to increase in the coming year. “Digital assets, for example, have become a mainstream trend, with their rise in popularity attracting the attention of both alternative fund managers and investors,” said Christine Lin, EY Greater China 26 ASIAN BANKING & FINANCE | Q2 2022
DBS Bank launched a cryptocurrency digital exchange platform in 2021
Wealth & Asset Management Leader. It comes as no surprise, then, that banks will follow suit given that cryptocurrency is now very much in the eyes of investors.
Christine Lin
Crypto trading and custodial fees can boost and diversify income
Income gains Crypto trading and custodial fees can boost and diversify income, according to Fitch report. “Banks may be able to develop competitive advantages in emerging financial service fields or engage with new customer segments, depending on their risk appetite,” Fitch said. They may also be able to protect their market positions against competitive threats posed by cryptocurrency-focused entities and technologies in segments, such as wholesale clearing and settlement, and cross-border payments. Higher costs on the horizon However, regulators’ growing
antagonism against cryptocurrencies and crypto-focused entities is developing quickly and may most likely raise costs. “Changes could raise compliance costs or curb existing or planned business activity, even as tighter regulation helps to contain financial and operating risks, providing greater assurance to potential crypto investors and users,” Fitch said. Cryptocurrency engagement may also likely expose banks to more legal risks, such as money laundering and terrorism financing. Banks’ reputations are also at stake should they offer crypto services, even from activity that is legal, warned Fitch. For example, if customers perceive banks have tacitly endorsed crypto trades that subsequently turn sour, this could most likely impact lenders’ reputations. The higher capital and operational requirements related
