It’s November, the holidays are just around the corner, Custodia Bank has just launched its Bitcoin custody platform, and Sam Bankman-Fried has been found guilty by jury for all of the charges against him related to the multi-billion dollar liquidity crisis which led to the ultimate collapse of FTX. If that isn’t enough, we are on the cusp of yet another monumental shift as we anticipate the approval of the first spot ETFs for Bitcoin. This development will catapult the digital world’s unofficial non-sovereign reserve currency into the same investment segment as gold, silver, and crude oil.
In case you haven’t been following, back in June, the world’s largest asset manager, BlackRock, took the first steps to launch their iShares® Bitcoin Trust with the largest crypto exchange in the U.S., Coinbase, functioning as the crypto custodian for the new exchange traded fund. There have been several (over 30, in fact) applications filed to try and establish similar spot ETFs, but none that carry the weight of BlackRock’s 9 trillion in assets under management (AUM), their stellar track record in the ETF space, and the well-connected friends of BR’s CEO Larry Fink.
At this point you may be asking what non-traditional banks, crazy-haired fraudsters, a $9,000,000,000,000 AUM company, and spot ETFs have to do with your local credit union. All fair questions, which we’ll unpack over the next few paragraphs with help from some historical data from a phenomenon observed throughout the world called ‘The Starbucks Effect,’ and a quick review of the history of GLD, the world’s first spot gold ETF. The next chapter of digital assets, in light of these recent developments, is likely to mirror the lessons learned from Starbucks and GLD, giving us a lens with which to see into the future as new real-world examples continue to underscore the importance of a robust and decentralized financial ecosystem.
The influence of a recognized brand gives consumers trust and confidence in a company’s goods and services. Starbucks and the ubiquitous green mermaid logo promise a consistent specialty coffee experience, which revolutionized how we consume and perceive what had been a generic cup of coffee. With its presence on every corner, Starbucks redefined the way we think about our favorite morning beverage. It’s not just a caffeine fix; it’s an experience, one we can rely on completely. The green mermaid became a symbol of quality, consistency, and comfort.
In his statistical analysis, Dr. Philip Gayle, professor of economics at Kansas State writes the following: “The empirical analysis reveals that market entry of an additional Starbucks café shop is predicted to increase retail price and the quantity sold of a typical Starbucks packaged ground coffee product by an average of 0.5% and 12.3%, respectively, and increase the retail prices and quantities sold of non-Starbucks packaged coffee products by an average of 0.7% and 5.5%, respectively.” Starbucks’ net impact on the commodity was an increase in accessibility and consumer expectations, leading to more foot traffic in both ‘mom-and-pop’ coffee shops, grocery stores, and a tenfold increase in the sales of coffee sold at a premium price point over the last three decades.
In a parallel vein, the introduction of Exchange-Traded Funds (ETFs) for gold, particularly the SPDR Gold Trust (GLD), transformed gold, a precious and historically valuable commodity, into an easily accessible retail product, instantly available to the everyday investor. Almost overnight it became unnecessary to buy and store physical coins and bullion to hedge wealth against inflation.
All the way back in 2012 John Stoltzfus and Matthew Naidorf wrote “Uncertainty, financial crisis, currency debasement, accommodative monetary policies, and central bank additions to gold reserves undoubtedly whetted investors’ appetite for the “safe haven” and “storehouse of value” attributes of the metal. We believe, however, that ultimately it was the accessibility and liquidity provided by the ETF structure that facilitated the momentum and scope of gold’s performance.”
If that sounds familiar, it’s because consumers are again facing geo-political and financial uncertainty, currency debasement, and continue to seek safe havens and storehouses of value for the fruits of their labor. This is one of many reasons we have already seen global adoption of non-fiat, decentralized digital assets. Financial institutions are facing an event horizon – leverage the trust they have built with their members to provide safety and security for years to come or be drawn into the black hole of financial irrelevance.
Just as Starbucks and gold ETFs reshaped their respective domains, Bitcoin ETFs have the potential to transform the way we perceive and invest in digital assets. The success of Starbucks was not just about the coffee; it was about the trust in the brand, the reliability of the experience, and the accessibility it offered. Similarly, Bitcoin ETFs carry the potential to reshape the digital asset market, emphasizing the significance of trust in a digital realm.
Recent developments underscore the critical importance of a robust, local, and decentralized infrastructure. The collapse of FTX and the legal troubles faced by its founder, Sam Bankman-Fried, serve as stark reminders of the potential pitfalls facing consumers every day. These events underline the need for thorough due diligence, transparent operations, and regulatory compliance. While the potential for innovation and profit in the crypto space is enormous, it comes with risks that need to be carefully managed by community-focused institutions.
The decision by major institutions like Chase Bank UK to block account holders from purchasing cryptocurrencies due to fraud concerns highlights the challenges posed by fraud and security in the crypto space. Consumers are seeking trusted avenues for their crypto investments, and this creates an opportunity for credit unions to step in as custodial service providers and digital asset transaction facilitators.
Banking policies blocking crypto purchases reflect concerns surrounding fraud and the need for robust security measures in the crypto space. The closure of the Japanese exchange JPEX serves as a good reminder of what can happen when regulatory policy is ignored, and trust is broken. The high number of fraudulent activities and the potential risks have led many financial institutions to take a ‘wait and see’ approach as a precaution to protect their customers.
This response, rooted in fear of the unknown, presents a unique opportunity for credit unions to get educated and take prudent and informed steps forward. Investors seeking trustworthy avenues for their crypto holdings are already turning to these local institutions for secure custodial services. Germany’s DZ Bank has just launched a digital assets platform for its institutional investors, and says “within the next ten years, a significant proportion of capital market business will be processed via distributed ledger technology (DLT)-based infrastructures. In the medium term, we see DLT as a complementary technology to the established infrastructures in the existing capital market processes.”
We agree, which is why we work with financial institutions, deeply rooted in their communities, to build a bridge between traditional financial services and the world of digital assets. By offering custodial solutions with a focus on security, credit unions can meet the growing demand for decentralized crypto investment services.
Bigger isn’t always better; large exchanges and brokerages, while convenient, expose consumers to extraordinary risks by serving as single points of failure. Even the most trustworthy platforms like Coinbase and Robinhood are not immune to vulnerabilities, as they become prime targets for malicious actors. The ‘honeypot problem’ poses a significant challenge in the cryptocurrency space; large exchanges, although convenient and accessible, often become targets for hackers due to their centralized nature.
Credit unions can offer a solution to this problem. By providing secure custody services, they mitigate the risks associated with centralized exchanges and ensure that members’ assets are stored securely, reducing the reliance on a single point of failure. This approach aligns with the principles of decentralization that underpin both cryptocurrencies and our traditional retail banking sector, providing a safer alternative for investors.
The evolving cryptocurrency landscape calls for a balance between innovation and security. The potential for significant profit and the transformative power of digital assets should not overshadow the necessary role of safe, trusted financial partners. Just as the success of Starbucks was built on the trust earned with the public, the success of Bitcoin ETFs and the broader digital asset market will hinge on security, trustworthiness, and reliability.
Local banks and credit unions are poised to play this critical role in the emerging financial landscape. They have the opportunity to preserve deposits and build modern, digital banking products by offering secure custodial services, remaining trusted partners and advisors for consumers and investors. By extending their services to meet the evolving needs of their communities, local financial institutions can help create a more resilient, less centralized, more secure economic ecosystem.
As we navigate the paradigm shift brought by Bitcoin ETFs, we draw from the lessons of history to help illuminate and navigate the era of digital assets, streaming money, and decentralized finance. The path forward is clear: informed action, trustworthiness, and community-based solutions. These principles will guide us toward a safer, more equitable financial future, where opportunities are expanded, and risks are minimized in the dynamic world of digital assets. Will you take the first step with us?