Before diving into cryptocurrency, Bank of America is dipping a toe in the water with an assessment by its own study group, which this week released its “first inning” of findings that noted the potential risks and gains on the horizon.

The report’s title, “Digital Assets Primer: Only the first inning,” alludes to the still-nascent nature of crypto and its technology. “We are only in the first innings of a major change in applications across most industries that will take place over the next 30 years, in our view,” the report states.

The $3.03 trillion bank believes that major change will come in the applications built on the “new medium” or platforms based on distributed ledgers and blockchain technology ― the architecture of cryptocurrency. Such applications, in areas including decentralized finance [DeFi], digital identity and supply chain, “appear to be growing more quickly than past technologies,” according to the bank’s 141-page report.

It’s the technological ecosystem underpinning cryptocurrencies where Bank of America sees the most potential. Regarding that ecosystem, research leader Alkesh Shah, head of global cryptocurrency and digital asset strategy, said the bank aims to explore “the implications across industries including finance, technology, supply chains, social media and gaming.”

Words of caution

Expect winners and losers within this new medium, the report cautions.

“New companies are likely to emerge and poorly positioned companies will exit, creating significant upside potential for some and downside for others,” the report notes. Indeed, while “hundreds of companies are now within the digital asset ecosystem” serving a variety of roles, “many are just two [quantitative analysts] in a garage,” according to the report.

Bank of America also points to India and China banning Bitcoin trading “while they figure it out,” and notes the lack of a clear regulatory framework for cryptocurrencies in the U.S. While such a framework looms as a potential headwind, the report states, it is likely to become a tailwind once it’s established.

“Digital asset bulls expect strong performance once governments and regulators introduce the rules of the road, but in our view, there’s likely to be plenty of volatility along the way,” the report states.

The bank also addresses stablecoins, which are cryptocurrencies tied to a fiat currency like the U.S. dollar and backed by fiat currencies or assets, and once again points to regulatory uncertainty. “Facebook’s proposed Diem stablecoin, broader stablecoin acceptance and a lack of transparency around stablecoins’ reserves composition have drawn regulatory scrutiny,” according to the report.

Bank of America in its report also provides some more specifics about regulatory concerns. With cryptocurrencies in general, it states, “some of the key issues that governments and regulators appear to be focused on revolve around [anti-money laundering/know your customer], mitigating potential bank runs, taxation and liability,” it notes.

Counterpoints

Jeff Dorman, chief investment officer at institutional digital asset management firm Arca, said traditional financial institutions’ research on digital assets “is far too focused on Bitcoin and cryptocurrencies.”

The research “doesn’t dive deep enough into cash-flow producing types of assets that are growing and becoming prevalent within the asset class ― for example, asset-backed tokens and pass-through tokens across different sectors like [non-fungible tokens], gaming, DeFi, [centralized finance], Web 3.0, etc,” Dorman told Bank Automation News.

Even so, “it’s a starting point that the banks and their clients can build on,” he said.

Dorman also addressed the idea of a possible “bank run” situation in a mass cryptocurrency sell-off, which he asserted is not unique to digital assets. “There are hundreds of stocks and bonds that have concentrated ownership, where one seller can move markets,” he said. “Yes, certain digital assets have concentrated ownership, but that simply puts more onus on buyers to do their research, and token issuers to work more toward diversifying their token-holder group.”

As for the potential for regulatory changes or restrictions on crypto, Dorman said he hears this question from about three out of four clients.

Cryptocurrency regulation is important and inevitable, “and it will likely make the industry bigger, better and stronger,” he said. But until there’s a clear regulatory framework, there’s “a feeling of anger” among market participants over the sometimes “confusing and contradictory” headlines, which themselves can spur volatility.

The threat of regulatory activity is also keeping potential crypto investments “on the sidelines,” he told BAN. For those who own digital assets, a key approach before there is regulatory clarity is to diversify your investments, Dorman said. “There is simply no single point of failure in this industry, because everything has a perfect substitute.”