Cryptocurrencies suffer from volatility in the best of times, and markets have spent most of the last two years in the red. But companies, markets and entire economies all over the world are tanking. So, is cryptocurrency’s notorious Achilles’ heel affecting its banking and payments sector?
As 2020 staggers on, the scourge of the coronavirus is showing no sign of relenting any time soon. Since the reality of the pandemic took hold, it has revealed itself to be a black swan the likes of which have never before been seen.
SoftBank posts hard landing
There’s not a business in the entire world unaffected by the coronavirus. Never have companies been faced with such a sudden onslaught of unforeseen pressures, with supply chains interrupted and customers and employees alike locked down worldwide.
Crucially, many crypto firms are committed to decentralization, meaning that working from home has been a relatively easy shift. But some of the industry’s biggest names have been snarled up in the fallout from the coronavirus. SoftBank Group Corp., the parent company of Fortress Investment Group, is expected to rack up a $12.5 billion loss for the financial year that ended in March.
Founded by Masayoshi Son, a Korean-Japanese billionaire tech entrepreneur, investor and philanthropist, SoftBank Group Corp. is one of the most prominent crypto holding companies operating in Asia. But it appears that the Vision Fund, an investment fund in which SoftBank has a $33 billion stake, is proving to be a major drain on the company’s profits. The group announced that it was set to lose $17 billion after its fateful investment.
But this isn’t the first time that the bank’s CEO has been burned by crypto. Son allegedly lost $130 million after a poorly judged Bitcoin (BTC) investment. He reportedly bought in when crypto’s most famous token was soaring high back in 2017.
Galaxy Digital fails to shine
But SoftBank isn’t alone in struggling with its crypto-related business. With yet another net loss in the fourth quarter of 2019, it seems that Galaxy Digital’s stars are far from aligned. Galaxy Digital is a major cryptocurrency investment bank founded by ex-Goldman Sachs partner Mike Novogratz with the ambitious vision of institutionalizing the crypto industry.
The industry has seen a huge influx of institutional interest, varying from utility, to coins, to central bank digital currencies, but Galaxy Digital has struggled to balance its books, with nearly constant quarter-on-quarter losses.
As per an April 8 announcement, the company reported a net loss of $32.9 million in the fourth quarter of 2019, citing “realized loss on digital assets” and operating expenses as the reason for the loss. The disappointing financial results are the latest in a string of poor performances, with losses of $134 million and $68.2 million in the first quarter of 2018 and the third quarter of 2019, respectively. Despite the quarterly loss, Galaxy Digital reported that it had not been that badly affected by the coronavirus crash and has asked all employees to work remotely:
“Nonetheless, the Covid-19 pandemic has caused global economic uncertainty and is likely to impact the Company’s investments and business activities in the coming months, with offsetting potential benefits to the Company from increased volatility and expansive global monetary and fiscal policy.”
Despite the company’s claims of weathering the COVID-19 storm with relatively little turbulence, some reports have suggested that Galaxy Digital has cut its workforce by no less than 15% this year.
Is crypto banking worse off than traditional banking?
Crypto markets are buffeted about by myriad factors, as well as deep philosophical divides. Regardless of whether or not the philosophical diversity of investors is a good thing, those who had hoped prices would skyrocket when traditional markets were in dire straits were left disappointed. So too were those who maintain crypto, notably Bitcoin, as a store of value above anything else.
Prices have crept up again, but they took a battering along with traditional markets in the initial stages of the pandemic’s unstoppable spread, leading some to argue that cryptocurrencies are now largely correlated assets. But the question of whether crypto banks are better or worse off in times of crisis has sparked debate among investors and observers alike.
Mathias Imbach, the co-founder of Sygnum – a major institutional crypto bank – and CEO of its Singapore branch, told Cointelegraph that instability equally affects both traditional financial markets and digital asset markets, but this does not necessarily have a uniquely negative effect:
“The fragility of the current system could also drive further interest in digital assets, which has historically demonstrated a low correlation to traditional asset classes (with the exclusion of immediate sell-offs during market shocks), and offers a potential hedge to financial markets. Empirical data from last month on our platform sustains this argument.”
Bill Zielke, the chief marketing officer of BitPay, a United States-based Bitcoin payment service provider, said that neither the nature of cryptocurrencies themselves nor the coronavirus were notably risky for the firm:
“We do understand that that crypto has a risk with price fluctuations, but BitPay’s business model is to remove that risk for merchants along with fraud and identity theft found with traditional credit cards. Merchants receive the full value of the purchase minus BitPay’s 1% fee.”
Crypto banking: What’s the impact?
Due to the uneven and rapid spread of the coronavirus around the world, businesses and governments alike have responded in different ways. One thing interesting to note is that crypto and blockchain businesses were often quick to implement protective measures. Many of the crypto conferences that took place around the world prior to the current state of the nearly global shutdown were marked by absences and low attendance, with travel bans being put in place and companies jumping to battle stations preemptively.
The digital asset bank Sygnum was one such company, telling Cointelegraph that management has put in place an action plan to protect employees and customers, stabilize operations, plan profit and loss scenarios, defend revenue loss driven by the macroenvironment, and plan potential cost takeouts to conserve cash. Sygnum’s Imbach explained to Cointelegraph that as the company operates in fully decentralized mode, it has been able to continue operations under lockdown conditions. Imbach said that since the crisis began, it has actually witnessed increased customer demand and has continued to launch new products:
“As a natively digital business we have been able to continue normal operations in decentralised mode, with our team across Switzerland and Singapore working remotely. We are still launching new products, and clients can onboard digitally or access our services through an e-banking portal.”
Monolith, a decentralized banking company based in the United Kingdom, is another company that is seeing the bright side of the rapidly developing financial crisis. A spokesperson for the company said that because this is not a traditional bear market, it is not witnessing the usual behaviour. By offering a variety of digital assets, the spokesperson told Cointelegraph that crypto banks can keep investor capital flowing:
“Those who would typically hold, are now seeking more liquidity in their assets as a response to the unpredictable nature of a global systemic problem. Where previously people would look to offset market collapse by committing to mainstream assets, the advent of more current solutions such as stable currencies offer them the hedge they want today using a reliable transacting finance facility.”
Like all unexpected, high-impact events, the coronavirus pandemic has left many businesses facing tough decisions. For some, this may mean closure, but Imbach says this difficult climate could serve as a catalyst for positive development in crypto finance:
“We believe COVID-19 brings challenges also for us, at the same time it also feels we’re witnessing a ‘fast forward’ mentality, more people thinking about the viability of today’s traditional financial system, many people reviewing their portfolio allocations etc.”
How are crypto bank customers behaving?
Few investors are likely to have forgotten the chaos wrought across global stock exchanges only a few weeks ago. Headlines share the doomsaying prophecies of statisticians and economists about the prospects of many of the world’s most vital economies. But it seems that while many of the key token prices have taken a hammering, it’s not all doom and gloom as far as crypto banking is concerned.
Imbach told Cointelegraph that the nearly global work-from-home restrictions have actually led to an increase in customer onboarding and transaction activity. Imbach added that customers have been increasingly concerned about counterparty risk and the degree to which their assets are segregated, along with having questions about Bitcoin as digital gold and requests for information about asset reallocation.
Imbach also mentioned that geographic sensitivity has increased, taking into account the regulatory status of counterparties, adding that this has come to be a major differentiating factor for Sygnum as both a regulated Swiss bank and a capital markets services licensed entity in Singapore. Imbach said that he has witnessed a change in managerial behaviour among clients, which is perhaps not unusual given the unique stresses faced by many companies, adding that: “We do not believe that current events will reduce institutional investors’ interest in digital assets mid-term, on the contrary.”
A spokesperson for Monolith told Cointelegraph that the firm views the current climate as an opportunity for crypto banks to offer decentralized solutions to clients in order to help them manage their funds more effectively. The firm also added that while it is witnessing an increase in stablecoins flowing into the platform, customers are not spending them at the rate they used to:
“This crisis has created an alignment between users searching for better options to save and DeFi offering them a more sustainable way to do so. Behavior on our platform has reflected this movement in a few unique ways. […] Where previously people would use our platform to load their Monolith VISA card to spend, they are now using it to hedge. This behaviour of converting into fiat and holding is not something we’ve witnessed in the past, and though a byproduct of circumstance, also shows faith in our feasibility as a genuine alternative to traditional banks.”
Conversely, Bitpay’s Zielke said its customers are still spending, albeit in an online capacity. Video games, delivery services and domain hosting are the prime areas, which is not entirely surprising given the state of lockdown for most customers: “Additionally, people have been buying more gift cards from the BitPay app or gift card sites like eGifter.com for purchases at Amazon, Whole Foods, Uber and Home Depot.” Despite the coronavirus, Zielke said that the first quarter of 2020 has been an improvement of over nearly 10% in terms of dollar volume as more people stay at home:
“Comparing Q4 last year to Q1, 2020, BitPay processed almost 10% more volume ($). Key verticals driving this increase were financial services, currency exchange, computer software & engineering and IT services which saw increases ranging from 11-40%. And crypto is crucial to people who do not have access to credit cards or a bank account.”
While many businesses are forced into taking a conservative outlook for future prospects, it seems that at Monolith is confident that the COVID-19 climate is a fertile environment for crypto banking and financial technology innovation:
“We currently have the largest holding of crypto that we’ve ever had and are in a strong position to continue innovating for another year and a half, as the dust settles, with no need to touch our crypto reserves.”