Canada’s big banks not likely to join Bitcoin bandwagon: DBRS

Investor appetite for Bitcoin may be growing, but Canada’s big banks aren’t likely to join the fray, says DBRS Ltd.

Amid a surge in the price of Bitcoin, retail investors and companies alike are increasingly adding crypto assets to their investment portfolios.

“Much of this interest comes from a building case that with the low interest rate environment, many companies will find some value from holding Bitcoin and other cryptocurrencies as part of their cash holdings,” a report from DBRS said.

For instance, Tesla Inc. disclosed that it acquired US$1.5 billion in Bitcoin as a cash diversification measure.

Yet, Canadian companies generally, and the big banks in particular, haven’t been as quick to jump on the bandwagon, DBRS noted.

Even faced with a low interest rate environment that is pushing investors to seek returns in unconventional places, DBRS said it doesn’t expect the six large Canadian banks “to accumulate significant levels of cryptocurrencies.”

“This lack of enthusiasm can be attributed to the accounting treatment of cryptocurrency holdings, price volatility, as well as fundamental questions about the risks associated with privacy, illicit activity, and the legal and regulatory safeguards surrounding cryptocurrencies,” the rating agency said.

Given the array of risks and the lack of regulation in the crypto space, for the big banks, the risks of holding Bitcoin continue to outweigh the benefits, the report said.

Alongside the risks, international accounting rules do not treat cryptocurrency holdings as cash, DBRS noted.

As a result, it said that the banks may “hold a relatively small amount of Bitcoin or other cryptocurrencies to help facilitate and support trading by clients of their wholesale banking businesses,” but that these activities would be limited.

“Under these circumstances, any cryptocurrency holdings would be reflected as trading securities on their balance sheet,” it said.

Additionally, it suggested that the banks may embrace crypto in their investment offerings for clients.

In the past couple of weeks, several independent asset managers have introduced Bitcoin-focused ETFs, following the earlier introduction of mutual funds that hold crypto.

“To meet growing investor demand, the six large Canadian banks may potentially add cryptocurrencies as investments in funds managed by their global asset management businesses,” said Robert Colangelo, senior vice-president, global financial institutions group at DBRS, in a statement.

Apart from their investment offerings, the report said the banks will likely find the underlying blockchain technology to be useful in other parts of their businesses.

“[Blockchain] has the potential to improve efficiency in executing lengthy and complex processes while also increasing the level of security and transparency,” the report said, noting that, “extensive adoption of the technology will likely occur over the longer term.”

The prospect of future regulation in the cryptoasset space will also continue to be a consideration for the banks, the report said.

“With the regulatory environment evolving at a slower pace than digital asset adoption, we expect all banks will need to understand their exposure to cryptocurrencies and mitigate any of the associated risks,” it said.