Back to the Future — Citi Does Crypto

Maybe….

The following headline from the Financial Times online article by Eva Szalay from their London bureau on May 6, 2021 caught my attention.

“Citi weighs launching crypto services after surge in client interest”

“Exclusive: Wall Street bank says trading, financing and custody all under consideration” source: FT.com

Citibank publicly announcing they are considering Crypto custody in 2021 makes me think maybe they have their own Marty McFly inside of Citibank that time traveled and showed the Citibank team what Crypto will eventually become.

Time travel aside, it takes very little imagination to see that Crypto is the future and that banks need to not be left behind. The first data point is Coinbase’s IPO and subsequent earnings.

Coinbase Results:

• Revenue in Q1–21 of $1.8 billion
• Revenue in Q4–20 was $585 million
• Revenue in Q4–19 was $191 million

This is growth that any startup would envy and any bank would kill for….maybe literally. (just kidding)

Don’t get me wrong, Citibank is doing fine with their 2020 net income of $11.4 billion on revenues of $74.3 billion. (source: Citibank Investor Relations) For perspective:

Citibank Enterprise Value: $140 Billion

Coinbase Enterprise Value: $85 Billion

An enterprise value to revenue ratio shows why Citibank might have a little Enterprise Value envy.

This means that Coinbase is trading at nearly 75 times revenue while Citibank trades at 1.88 times revenue.

These valuation to revenue ratios seem insane but we all know Wall Street values future growth over current operations which means potential is more important than results. There are other examples of this phenomenon in nearly every Fintech vs Legacy provider comparison including Stripe v Fiserv which I have done previously.

Why take the risk, why now…again I am not presuming Citibank has mastered time travel, so I think this sentence from Financial Times sums it up best:

“Despite the reputational challenges, large dealers have been forced to respond to surging interest in bitcoin from asset managers and hedge funds.” FT.com

I find the points about reputational risk ironic as I have just finished reading “Dark Towers” by David Enrich about Deutsche Bank and their numerous shenanigans on Wall Street and how much they paid in fines and bonuses. I can not imagine that they would do worse in Crypto than they did in LIBOR manipulation.

Further to the point from the FT.com article

“In March, Citi issued a 108-page report noting that despite “a host of risks and obstacles that stand in the way of Bitcoin progress”, the cryptocurrency “may be optimally positioned to become the preferred currency for global trade”.

Citibank saying out loud that Bitcoin could become the currency of global trade is pretty stunning. Remember that Citibank TTS (Trade & Treasury Services) is the corporate bank and does trillions in global trade across their Letters of Credit, Trade Finance and corporate payments as well as FX. This is why I am writing about this in my B2B Buzz blog.

If you haven’t read this report yet, here is the link, I have scanned it and the other Citi GPS report on the Future of Money (Crypto, CBDCs and 21st Century Cash). BTW, you should subscribe to the Citi GPS reports, well worth your time.

Why would Citibank announce they are thinking about Crypto Custody?

No inside information here, but I am pretty sure this is a “trial balloon” for both their customers and regulators. No harm in saying, “hey we like this for the future…” then waiting for the public response and either leaning in or out based on the response.

My guess is the public response will be something along the lines of

OK, do it already.

The other reason for Citibank’s TTS to consider crypto is not Bitcoin but the sudden, yet steady rise in Ethereum value.

“Ethereum is an open-source, blockchain-based, decentralized software platform used for its own cryptocurrency, ether. It enables SmartContracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control, or interference from a third party.” Source: Investopedia

Reading this summary of Ethereum you see lots of business words that would excite the most staid corporate banker. Now add to this the fact that the total valuation of Ethereum is over $23 billion in total.

Think of Ethereum as the business crypto and bitcoin as the consumer crypto. This simplification of course ignores the importance that Bitcoin has played during the past year as an alternative investment for treasurers.

As I think of my own crypto holdings which are tiny, but for full disclosure I own a couple of Bitcoin and a few Ethereum. I hold them in my Coinbase account. If Paypal or another mainstream financial platform had offered Crypto services when I bought mine, I would never have opened a Coinbase account.

THIS is why banks need to get on board before they are not part of this new financial market. Most B2B clients and consumers will default to their current accounts for Crypto if they are available.

Finally a thank you to Oliver Bussmann as I started this article based on a FT.com link from his excellent newsletter. You should sign up as Oliver is hyper focused on Crypto but not from the perspective of a Bitcoin maximalist but from a business perspective which is what Crypto needs more of.