Keeping Enemies Close: JPMorgan Servicing Crypto Firms Opens a New Frontier

Published at: May 20, 2020

As the largest among the United States’ “Big Four” banks, JPMorgan Chase comes across as an unlikely ally to digital asset service providers seeking to break through the glass ceiling still separating traditional and crypto finance. When the news broke on May 12 that the bank has been serving U.S.-based crypto exchanges Coinbase and Gemini since April, some digital finance experts saw it as a sign that the relationship may finally be thawing.

Despite JPM’s CEO Jamie Dimon consistently disparaging cryptocurrencies’ aptitude as a financial instrument, the institution has not been dismissive of blockchain technology, most notably developing proprietary DLT-based tools for international settlements. Now that the major U.S. bank seems to be extending its acceptance to crypto-related businesses as well, are the traditional players having a qualitative shift in perception of the digital finance space?

The importance of being compliant

Coinbase and Gemini are well-suited to be in the vanguard of the crypto industry’s integration with the traditional financial system. The two companies have been particular about securing the most exacting regulatory credentials on both federal and state levels.

Both are registered with the U.S. Treasury’s Financial Crimes Enforcement Network, and their custodian services have earned security qualifications in accordance with rigorous certification standards. They have also obtained notoriously scarce licenses from New York State Department of Financial Services: Gemini holds a Trust License, while Coinbase operates under a specialized BitLicense.

Experts surveyed by Cointelegraph noted that crypto firms willing to walk the extra mile to ensure full regulatory compliance will be the first to capitalize from mainstream financial institutions’ growing interest in digital assets. Michael Sonnenshein, the Managing Director at digital asset management firm Grayscale Investments, commented to Cointelegraph that JPMorgan’s announcement — alongside the news of Paul Tudor Jones’ allocation to Bitcoin — shows promise for greater cooperation between financial firms and compliant digital currency firms, adding:

“There is increased awareness in the banking sector that digital currencies represent a growing market with strong upside potential. Those that are leading the way in terms of regulatory approvals will be able to reap serious benefits through these relationships.”

Pursuing mutual interests

While legacy banks could benefit from the digital assets’ potential and rapidly expanding user base, crypto firms require banking services because most of their day-to-day operations are still fiat-based. Some traditional financial organizations have already tapped into this market, so JPM’s move is hardly unprecedented. Amrit Kumar, president and chief scientific officer of the blockchain company Zilliqa, told Cointelegraph:

“State Street — the second oldest non-retail bank in the U.S. — has been offering custody services to stablecoin issuers such as Gemini. Silvergate is also another bank that has been serving crypto players by offering fiat banking services. Having said that, JPMorgan’s entrance in this area gestures toward the growing trend where traditional institutions are now offering banking, custody, and other services to blockchain companies.”

Marc Fleury, CEO and co-founder of the fintech firm Two Prime, weighed in with a similar point: “For all the hype around ‘replacing traditional finance,’ crypto companies still need to maintain bridges to the fiat system, for not everyone accepts crypto for payments.”

According to Adam Traidman, CEO of crypto finance firm BRD, there is a difference between routine banking services that every digital currency company has to request at some point and strategic partnerships that can reveal more fundamental shifts in market structures. He added:

“It’s more than just a banking customer for corporate treasury management. It’s strategic, and could be a channel for customer acquisition, a technology play for the creation of a digital currency or perhaps even more likely, the beginning of an aggressively developing M&A market for crypto companies, where traditional financial institutions are the buyers.”

What do big banks want?

What could these strategic partnerships entail in the case of JPMorgan Chase and regulated crypto exchanges? One of the answers could lie in the bank’s business model that emphasizes wealth management and catering to high-net-worth clients. Meltem Demirors, chief strategy officer of investment firm CoinShares, noted to Cointelegraph:

“It appears that the initial focus will be custody clients, who are by nature high net worth individuals and institutions. […] It is likely that closer collaboration with two regulated, highly respected crypto firms will be beneficial for JP Morgan to bring digital assets to their wealth management clients in a controlled, low-risk manner.”

Demirors mentioned that JPMorgan Wealth Management has been courting crypto wealth for some time, and many digital finance executives are likely personal clients of the bank already. Another reason why establishing ties with major crypto platforms could prove a solid business move is the rising demand for exposure to digital assets and banks’ corresponding drive to meet this demand. Demirors said that banks would rather offer low-risk exposure to crypto “versus seeing AUM [Assets Under Management] leave their platforms to flow into crypto.” She went on to add:

“I imagine most banks will look to partner first, before investing in building their own infrastructure, but as evidenced by Fidelity, some may also choose to bring these capabilities in-house as the opportunity grows.”

Another lens through which the emerging partnership could be viewed is investment logic, as Fleury noted to Cointelegraph:

“There is some justified speculation that JPMorgan, an investment bank, is angling for the future underwriting business for the rumored IPOs of the two stalwart exchanges. Even if that were the case, the establishment of these traditional banking relationships marks a new era of legitimacy for crypto at large.”

Aside from these direct benefits, there are some far-flung considerations that might have contributed to JPM executives’ decision to get involved with cryptocurrency players. For one, Traidman thinks that the bank could be looking to gain a foothold in the digital finance space ahead of the U.S. government’s anticipated move toward digitizing the dollar at some point in the not-so-distant future:

“This may be the first step in the private sector’s foray to attempt and win contracts from the U.S. government to implement contactless payments via the ‘Digital USD’ referred to in the first draft of the original stimulus bill. Keep your friends close; keep your enemies closer. […] Their strategy may be to onboard crypto companies and then leverage the relationships to prove out a commercial version of such digital currency technologies prior to the U.S. government awarding a contract to the private sector.”

What comes next

Manuel Rensink, Strategy Director for the fintech firm Securrency, considers JPM’s move to bank Gemini and Coinbase a “game-changer,” adding that it “provides a roadmap for the deeper integration of digital assets into mainstream modern finance.” Rensink anticipates that many more traditional banks will follow the example and get involved with the regulated crypto sector due to digital assets’ natural edge from the advantages provided by their underlying tech:

“The programmability of digital assets on blockchain rails allows for better security, smarter compliance, and faster distribution to those in society in need of funds. While borrowing the unit of account convenience from the USD, a digital asset can be a more efficient medium of exchange that can immediately move between your phone and existing payment infrastructure.”

Additionally, Kumar is convinced that “blockchain-backed assets are no longer an asset class that traditional financial institutions can afford to avoid.” Tapping into the niche is an opportunity for traditional financial institutions to offer products and services appealing to both crypto-native and non-native users.