South East Asian banks venturing into crypto face heightened risks, warns Fitch

After a year of enthusiastic ventures and acceptance regarding cryptocurrencies, banks in South East Asia might be in for a hard time going forward, analysts at top financial institutions have warned.

Sun rising over the East

2021 was the year that cryptocurrencies truly went mainstream, and emerging economies reaped the benefits of the same through heightened adoption and investments. Banks in the region also jumped on the bandwagon owing to growing customer demands, including Singapore’s DBS, which launched its own Digital Exchange platform.

Similarly, Thailand’s Siam Commercial Bank grabbed a 51% stake in cryptocurrency trader BitKu, and more recently, Union Bank of the Philippines revealed plans to provide crypto trading and custodial services.

While such ventures could help these banks in boosting trade and custodial fees over time, an analyst at credit rating organization Fitch has warned that bigger risks are lurking as crypto disruption and regulatory responses could move faster than the executive functionary can handle.

Rising concerns

In a recent blog post highlighting the same, Fitch analyst Tamma Febrian noted,

“Changes could raise compliance costs or curb existing/planned business activity, even as tighter regulation helps to contain financial and operating risks, providing greater assurance to potential crypto investors and users.”

She added,

“Where banks have weaker risk controls, there may be a greater potential for crypto engagement to expose them to legal risks, for example around money laundering and terrorism financing.”

Reputational risks are also an added concern, said Febrian, as crypto trades that subsequently turn sour could erode consumer trust in the banks endorsing them.

Increasing correlation a risk

Another possible hurdle could arise from increased adoption, which analysts at Goldman Sachs have called “a double-edged sword.” This is because rather than translating into expected price gains, mainstream adoption has pushed cryptocurrencies to become increasingly correlated with macro assets such as equities.

This can most recently be seen in bitcoin’s increased vulnerability to the US Federal Reserve hiking interest rates, as the top coin lost 19.1% of its valuation in January. In a recent research note, Goldman strategists Zach Pandl and Isabella Rosenberg argued,

“While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”

The International Monetary Fund has also raised similar concerns in the past, adding that the increasing correlation could cause contagion risks within financial markets as investor sentiments spillover.

Nevertheless, digital asset adoption by mainstream banks has already begun to irk state regulators in the region, even as a boom in crypto and DeFi trade continues. Most recently, Indonesia’s Financial Services Authority banned financial firms from offering or facilitating crypto trade, citing high risks and volatility associated with the asset class.