JPMorgan Chase's decision to extend banking services to two bitcoin exchanges could pave the way for other cryptocurrency firms to secure their own banking partners, a Capco analyst told Banking Dive.
The nation's largest bank approved accounts for Coinbase and Gemini last month, The Wall Street Journal reported this week, and transaction processing is just beginning, sources told the publication.
"What we are seeing right now with Gemini and Coinbase is a roadmap on how to partner and succeed with the mainstream financial services industry," Robert Norris, a managing principal at consultancy firm Capco, told Banking Dive.
It's a surprising development for JPMorgan, whose CEO has been known to disparage bitcoin in the past.
During the Delivering Alpha conference in 2017, the bank's chief executive, Jamie Dimon, called bitcoin "a fraud" and said he would fire "in a second" anyone at JPMorgan found to be trading in bitcoin.
"It's not a real thing, eventually it will be closed," Dimon said.
The bank, however, has invested in blockchain technology, upon which bitcoin is built. JPMorgan last year created its own U.S.dollar-backed token, JPM Coin, to speed up payments. The bank plans to use its blockchain unit Quorum to issue JPM Coin to settle interbank transfers.
Whether or not Dimon has changed his stance on bitcoin, the decision to bank two bitcoin exchanges is a solid play for JPMorgan Chase, which is often seen as an innovator and industry leader among its peers, Norris said.
"JPMorgan is looking at this as a growing market," said Norris, who added that about 25 million people in the U.S. own some form of cryptocurrency. "This does not mean that JPMorgan is going all out on crypto. This is a commercial decision. And I think this recognizes that they are fast becoming established businesses, and the regulatory risk has been vastly reduced over a period of time."
Although concerns over fraud and money laundering have made banks hesitant to link up with crypto firms, the gains Gemini and Coinbase have made on the regulatory front could signal those risks are diminishing.
"We've seen both firms adopt a proactive regulatory approach, and we're starting to see the benefits of that come to the surface right now," Norris said.
Gemini obtained a trust charter from New York’s Department of Financial Services (NYDFS) in 2015, and Coinbase is registered as a money services business with the Financial Crimes Enforcement Network (FinCEN).
Both exchanges have gone through the rigors to operate under NYDFS's BitLicense framework and are licensed money transmitters in multiple states.
A JPMorgan spokesperson declined a Banking Dive request to comment on the Journal’s report, but said the bank is supportive of cryptocurrencies as long as they are properly controlled and regulated.
With JPMorgan now reportedly serving the space, other banks could see this as the right time to follow suit, Norris said.
"It's a major signal of credibility to the [crypto] industry," he said. "Other banks are going to be looking at this very carefully."
Publicly traded La Jolla, Calif.-based Silvergate Bank is one of the few U.S. banks that serve crypto-related businesses, according to Coindesk. The $2.3 billion-asset bank has 850 digital currency customers.
What lies ahead
JPMorgan's partnerships with Gemini and Coinbase position the bank as a strategic partner in the cryptocurrency space and could lead to further opportunities as a banking provider from an initial price offering or business growth perspective, Norris said.
Opportunities aside, there is still reputational risk that comes with taking on clients in the cryptocurrency space, he said.
"The [know-your-customer] and [anti-money laundering] procedures that JPMorgan would have gone through to accept these clients, they would have looked at those very rigorously, and they are making sure they have the ongoing monitoring procedures in place to successfully support their regulatory obligations to the regulators, as well," Norris said.
JPMorgan likely will face questions from regulators because of the nature of the new clients, Norris said. "I'm sure it will be a topic of discussion," he said.