Cryptocurrencies and digital ledger technologies (DLTs) have become a topic that is nearly impossible to keep up with. The innovations come hourly as do the challenges.
Cryptocurrencies that were once derided as, at best, a fad or, at worse, a scam or way to launder money, have become a legitimate asset class reaching three trillion dollars in 2021.
A few highlights from 2021
Consumer adoption of crypto as an investment is somewhere between 25-30% of adults and represents 2.5% of the $120 trillion global equity market.
Institutional investment in crypto has increased exponentially with more than 50 U.S. companies holding crypto on their balance sheets and even more accepting crypto as a means of payment (including over 40 million PayPal merchants).
Companies like Flexa.co have emerged that allow spending crypto at the point of sale and completely bypassing the traditional network rails — with potential significant impacts on merchant fees and interchange.
Venture capitalists have invested $30 billion in crypto startups this year — more funding than the sector has received in every other year combined (the previous high was $8 billion in 2018). “Investors are funding anything and everything” crypto-related, according to PitchBook analyst Rob Le.
Regulatory guidance has been provided from the Office of the Comptroller of the Currency and National Credit Union Administration —both clearly allowing financial institutions’ movement into digital asset technologies.
We’ve seen banks announce and launch crypto/DLT solutions. This includes Vast Bank observing a 25% increase in their customer base eight weeks post-crypto product launch. We’ve also observed several financial institutions mint and leverage stablecoins for instant settlement 24x7x365.
Several major announcements have been made about Central Bank Digital Currencies as the world’s central banks scramble to keep up with China’s digital asset initiatives.
It certainly appears that the largest risk facing financial institutions is not having a crypto/DLT strategy.
So What?
Cryptocurrency is here to stay. Adoption is accelerating and offers opportunities for financial institutions that are willing to try something new. It certainly appears that the largest risk facing financial institutions is not having a crypto/DLT strategy.
Most financial institutions are observing their deposits flow out to the cryptoexchanges and they are unsure what to do. Clients under 35 are already active in cryptocurrency. Banks and their wealth management departments must take action this year to be relevant or they could potentially lose out on this and future generations.
We’ve observed a few crypto solutions coming to market that promise a solution via partnership between the crypto solution providers and popular mobile banking and processing partners.
While these solutions promise to make offering crypto to clients easy and offer “white glove” service, the reality of how competitive these solutions will be with the crypto exchanges, fintechs or early bank competitors remains to be seen since most of these solutions only offer a buy/sell/hold Bitcoin only option.
Will these solutions really be competitive to the existing crypto exchanges, or might it be better to launch a more elegant solution like that from Vast Bank? Vast Bank was the first national bank to give clients the ability to effortlessly buy, sell and manage cryptocurrencies 24/7, directly with their bank accounts. The reality is that the crypto solutions you pick today will need to be competitive, scalable and consider future solutions (like loans against those digital assets) that your clients will ultimately request.
There are several potential crypto product solutions that can be brought to market, but they will need to be considered in the broader context of your institution’s digital strategy and long-term roadmap. Some of these solutions include:
- Custody and trust
- Trading and investment alternatives/advice
- Rewards and gifting
- Considering digital assets in credit decisions
- Lending against cryptocurrency and to crypto businesses
- Stablecoins
- Staking
- Decentralized Finance (DeFi)
Invest time now
We advise any financial institution to invest significant time in early 2022 to truly understand these new technologies against their competitive landscape. Make sure you:
- Understand the extent of your existing outflows to the exchanges
- Talk with your clients (especially the younger generation) to determine their current and potential future needs
- Ensure your wealth management and trust staff are fully involved
- Develop short- and long-term digital roadmaps that include cryptocurrencies and DLTs
- Develop a product strategy to complement your broader strategy
- Understand the various vendors, solutions and technical considerations
- Have a good set of partners: technical, business, compliance, marketing, etc.
- Crypto is here to stay. It is growing. And, your bank needs to have a solid plan.
Strategic Resource Management (SRM) and CGI have been helping clients navigate the choices, build a roadmap and define solutions needed to thrive in this market. A primary goal for TBA’s MAGNET program has been to provide you a platform to engage in those same services. Visit www.texasbankers.com/MAGNET or email [email protected] for more information.