Embracing crypto

There has been a surge of interest in cryptocurrency from consumers to businesses to regulators over the last several years. Much of this stems from increasing communications and clarity from regulators, which in turn gives businesses the comfort to launch their crypto products in their respective markets. In the US, both the Securities and Exchange Commission and the Commodity Futures Trading Commission have put out new guidance and enforcement actions. The Senate has held numerous hearings on crypto regulation. While there is no global licensing system for cryptocurrency, there is a continued pattern of positive or no regulation for most countries. Additionally, countries like El Salvador have even adopted bitcoin to be legal tender alongside the US Dollar.

How has the crypto market evolved in recent years?    

There has been a surge in emerging use cases outside of the main “store of value” value proposition. Cryptocurrencies like Ethereum and stablecoins like USD Coin or USD Tether continue to see strong adoption. Ethereum has provided a springboard for Decentralized Finance (DeFi) applications that allow for consumers to become direct participants in activities previously limited to banks and other third parties (e.g. lending, payment processing, etc.) and partaking in the higher risk/reward that comes with that. Stablecoins, for instance, allow individuals and businesses to make direct payments and move funds across borders instantly 24/7 outside traditional bank hours and holidays without a third party.

What does this mean for financial institutions?    

This presents both a risk and an opportunity for financial institutions (FIs). Consumers have indicated their desire for new and innovative solutions to generate returns in today’s macroeconomic environment. Inflation is high and consumers are increasingly looking to seek out products and services that can help generate outsized returns accordingly. If traditional FIs do not offer this, consumers are moving their funds to brokers and service providers that do. One top 20 bank has seen outflows of hundreds of millions of dollars to cryptocurrency exchanges last year alone.

That said, FIs are trusted providers and consumers have indicated many would prefer their FIs add these additional services like the ability to buy/sell bitcoin instead of figuring out how to manage all that on their own. By adding crypto capabilities to their offerings, FIs can satisfy customer demand, add fast growing innovative products while sharing in the fee revenue opportunity.

What are the key considerations for FIs in building their crypto strategy—and where are most on this journey?  

FIs first need to decide where cryptocurrency is on the demand spectrum and what services their customers are interested in to determine the correct prioritization. This can be done actively by talking to customers, commissioning surveys and passively by analyzing bank outflows.

FIs then need to decide how much and what areas of the crypto business activity they want to perform themselves - partner vs. build and buy/sell/hold vs. DeFi lending/staking, etc. As cryptocurrency is still new for most FIs and not their main offering, many will prefer to partner with reputable and established cryptocurrency providers and lean on their regulatory, licensing, and reporting programs instead of building the same from scratch.

The FIs may want to engage with their respective regulators depending on how they are chartered and provide notice of their intended offering.

For most FIs, it is only a matter of when as it relates to crypto offerings. Consumers across all geographies and demographics want access to the rapidly growing cryptocurrency ecosystem. It is clear that cryptocurrency is not going away, so the decision is more if an FI prefers to be a leader or is content with being a follower in the space. 

Where do we see the future of crypto?    

Thirteen years since the invention of Bitcoin, it is clear that cryptocurrencies are here to stay. While there will always be cryptocurrency specific companies, most companies will incorporate crypto into their business in one way or another, often behind the scenes. From offering seamless ways to obtain exposure to the latest tokens through to cheaper, faster payments and managing global treasuries and foreign currency exchange, cryptocurrencies can offer a better way for individuals and businesses to transact leading to higher customer satisfaction and retention.