It was less than three years ago when the investment bank’s chief executive officer Jamie Dimon famously called Bitcoin “a fraud”, and threatened to sack any of his employees who were discovered trading it.

Dimon has eaten much humble pie since those comments were aired.

Some less charitable market commentators have accused the investment bank of hubris. They will be delighted to be proven right, then, hearing the news reported in the Wall Street Journal on 12 May 2020.

180-degree turnaround

Sources told the business newspaper that the San Francisco and New York-headquartered exchanges had become JP Morgan’s latest customers the month before, and transactions were just starting to be processed.

Gemini in particular has been at the forefront of attracting institutional interest in cryptoassets.

It seems a funny coincidence that these moves were happening behind closed doors right at the time when Q1 2020 earnings were reported to the market. The news was not good for investment banks on 16 April 2020. It was even worse for those with greater retail exposure.

JP Morgan saw its revenues and earnings crippled by the Covid-19 pandemic and subsequent economic lockdown. It ended the period with revenues down 4.4% and missed expectations with earnings per share a full 60% lower than Q1 2019. Even more shockingly, credit loss provisions — cash that banks put aside as reserves to absorb losses on loans — were forced six times higher than the same period the previous year at $8.3bn.

Dimon noted that the bank faced “unprecedented challenges” ahead.

Up for adoption

For the cryptoexchanges, however, this was just the latest in a long line of positive headlines.

Institutional acceptance has been relatively slow to reveal itself with cryptocurrency. This is mainly driven by piecemeal and inadequate regulation. Financial services maintain some of the most complex regulatory structures in existence. Without crypto companies being able to comply by the rules — many of which still don’t exist — institutional investors have stayed away. No more, however.

What we have here is an implicit acceptance by Wall Street towards Bitcoin adoption. At a retail level, people want cryptocurrency exposure and the same is true for institutions. A Fidelity study from May 2019 found that 22% of 400 customers already held some cryptocurrency and 47% intended to allocate a portion of their investment portfolio to Bitcoin or similar assets. That number will only grow over the next five years.

It is simply part of the furniture now. Bitcoin futures trade on the historic Cboe options exchange. Single asset ETFs — while still under scrutiny in the US, are listed on Switzerland’s stock exchange. German banks have been given leave to custody cryptocurrencies by the Bundesrat.

Let me tell you a story

In our opinion, the kinds of problems we have seen detailing the frustrations of cryptoasset companies and their inability to gain banking services will simply fade away.

Let us take Israel, for example. Few operators in the space will be able to forget the story of Bits of Gold. The exchange’s chief executive Youval Rouach reported how he was sitting in his Tel Aviv headquarters one morning in 2016 when he received a shocking letter from his primary bank, Leumi. It said he must stop doing business with cryptocurrencies or face his accounts being frozen. The reason? The bank had classified cryptocurrency firms as gambling companies.

There began a four-year battle through the courts for Rouach simply to conduct his legal business like any other entrepreneur.

On 16 September 2019 Rouach received the news he had been hoping for. The Israeli Supreme Court had come to a conclusion.

After granting a temporary injunction six months earlier, judges ruled that Bank Leumi had illegally denied his company banking services and must resume the Bits of Gold account. Of course, Leumi appealed.

Still, in a statement following the case, Rouach said: “We worked hard to set up a company, which met regulatory requirements, in a new industry, and those efforts paid off. I am proud to be a part of this flourishing industry and push it towards the right regulation.”

Down South

Legal disputes like this have become frighteningly common.

Reuters reported in January 2018 how Brazil’s securities regulator CVM had banned the country’s investment trusts from purchasing cryptocurrencies. Six major national banks, including Banco Santander Brasil, Itau Unibanco, Sicredi, Banco Inter and Banco Bradesco began to quietly suspend accounts belonging to cryptoasset firms without explanation.

Two years later, in May 2020, Brazil’s Administrative Council for Economic Defence (CADE) voted to resume its investigation into the closures following a complaint from cryptoexchange Bitcoin Max.

CADE charged the banks with colluding to “impose restrictions [on brokerages] or even prohibit access to the financial system”. Despite the growing popularity with both retail and institutional investors, Bitcoin Max had seen its bank accounts with Banco Brasil and Banco Santander shuttered without warning 18 months prior.

In response, the banks said accounts had been closed as a “security measure” to prevent money laundering.

This default status — to deny legitimate companies banking services for fear of breaching nonexistent regulations — must change. A ruling from Brazil’s Federal District Court in February 2019 found that Bitcoin Max should not have been denied banking services.

Brazil has now established a Parliamentary commission to begin working out a framework for national cryptocurrency regulations, but if we take history as a precedent, progress is likely to be slow.

Where next

Over the past decade it has been very difficult for cryptocurrency businesses to build products that are aligned with regulatory demands. Not because they are unwilling or unable. More because regulators are making it up as they go along.

In a market heavily reliant on pointing to what has come before, there are no precedents. It’s clear from anyone who has owned their own business that banking and credit facilities are all important. Want to raise funds to expand? You need a bank. Want to hold those funds? You need a bank. Want to attract institutional investors? You need a bank.

But with the most-recognised investment bank in the world in JP Morgan now accepting its previous failures, the switch to a cryptobanking world is not so far away.

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