Wealthy fintechs will find it hard to buy Gulf banks, says expert

Reuters

• Banking is not a realistic pivot amid latest crypto fallout
• Binance CEO is eyeing possibilities
• Repriced risk and tougher banking regulation are barriers

Wealthy financial technology (fintech) companies won’t find it easy to buy banks in the Middle East or other developed economies, no matter how much money they’re willing to put on the table.

A top banking executive expressed this view as reports that Binance, the world’s biggest crypto exchange, may go on a $1 billion acquisition spree in the current bear market. 

It is eyeing targets, including banks, in a bid to entice cautious conventional financial institutions into the nascent digital assets industry.

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Binance CEO and co-founder Changpeng Zhao (more commonly known as CZ) said earlier this month that he wanted it to “be the bridge between crypto and the traditional financial world”.

However Dubai-based Ronit Ghose, global head of banking, fintech and digital assets for Citi Global Insights, told AGBI that it would not be that simple.

“You could be a multi-billionaire and have all the money in the world and decide to buy a yacht or a private jet or an island, but you can’t just buy a bank,” he said.

“To buy a bank you have to be approved by the banking regulator. In fact, even to be a senior executive at a bank, a banking regulator has to approve you, in all countries.”

Ghose, who is also an advisory board member at the London-based Centre for Finance, Technology and Entrepreneurship, said that banks are regulated to a higher standard because they have a particular role in the economy – ie people have their savings in them.

“It’s got to be super safe. Banks in jurisdictions such as the UAE, UK and US, and national banks, federal banks and large banks are regulated typically to a different standard than a fintech or a crypto company. 

“A fintech might be regulated under a money transmission licence or an e-money one, for example,” he said. “And if a crypto company is regulated, there will be a specific crypto licence, which is not the same as a banking one.”

Ghose added that if a fintech or crypto company were to get a banking licence, the way they operate would have to change.

“Typically, the standards of internal controls and governance that require you to be a full bank is hard to do for these startups. 

“And crypto companies, even when they’re huge, are culturally startups. They’re run by one or two key people, who have significant influence or power in the industry. I’m not saying it’s a good or bad thing. It’s that such a model is suited for a different business. 

“Having larger-than-life, charismatic individuals is suited to young, rapidly growing companies or family-owned businesses,” Ghose said.

“But banks are almost like public institutions, even if they’re privately held. They have a different nature and characteristics.”

CZ, who according to Forbes has an estimated net worth of around $17.5 billion dollars, told a conference in Dubai earlier this year that banks that fail to catch up with blockchain and decentralised finance technologies will have a “hard time in the future”.

He said that banks should adopt new technologies “as early as possible” or risk being disrupted.

Shaken crypto sector

Binance, however, sits at the top of a rattled crypto market, which has fallen by about two thirds from its peak to $1.07 trillion.

Markets shook again this week, with investors pulling out from riskier assets in the wake of rising interest rates and rival exchange FTX appealed to investors for more funds to stay afloat.

In July FTX became the first fully regulated exchange to receive a provisional licence to ready itself to trial complex crypto derivatives dedicated to professional institutional investors in the UAE.

It now needs a cash infusion of more than $6 billion to cover customer withdrawal requests.

A message on the FTX website on Friday said: “FTX is currently unable to process withdrawals. We strongly advise against depositing.”

Binance walked away from a proposed bailout of FTX this week, citing due diligence concerns after reports the company mishandled customer funds and is allegedly under investigation by US agencies.

“Interest rates have been going up and we are transitioning to a new regime for risk and a repricing of risk,” Citi’s Ghose added. 

“With institutions that were considered blue chips in the crypto world, whether centralised exchanges or hedge funds, we’ve seen that the tide has gone out and they were all swimming naked.

“They didn’t have the risk processes and controls and segregations, and then everyone suddenly realised there’s a reason there are rules and regulations when it comes to client money. 

“Without rules, sometimes people cut corners and do things that aren’t prudent and safe – and that’s what’s happened.”