Regardless of their involvement in the financial services industry, anyone paying attention to the news lately will know that cryptocurrencies are making headlines.
As the worldwide economy becomes less predictable, regulatory agencies are wondering whether cryptocurrencies could be used to transfer money if other assets become subject to international sanctions, likening crypto to gold. According to an early March article from CNN Business, the price of gold has spiked and could surpass its all-time high before long, while bitcoin is trading 4% higher.
Crypto has also been in the news because of an executive order recently issued by President Joe Biden. The order requires the Department of the Treasury, the Department of Commerce and other agencies to look into and report on the “future of money,” specifically relating to cryptocurrencies.
As part of that order, those agencies need to outline the benefits and risks of creating a central bank digital currency (CBDC), informally known as the digital dollar. The digital dollar can be thought of as the Federal Reserve’s answer to crypto. It would act like cryptocurrency, with one big difference: It would be issued and regulated by the Fed.
How would this work? One idea involves government-issued digital wallets to store digital dollars. While the U.S. is not likely to take imminent action on creating a CBDC – Congress would need to approve it – it would not be a big leap to sell this concept to the American public. The Federal Reserve reports that cash use accounted for just 19% of transactions in 2021. Digital payments, meanwhile, are up. According to McKinsey’s 2021 Digital Payments Consumer Survey, 82% of Americans used digital payments last year, which includes paying for purchases from a digital wallet like Apple Pay. Using digital dollars, in a similar kind of digital wallet, wouldn’t be all that different. The future state of digital currency and the current state of online payments, credit cards, buy now, pay later purchases and more are, in effect, exchanging bills and notes for 1s and 0s.
What this means for financial institutions is a need to focus on education and information, and an ear toward new regulations.
Educating account holders will be vital. Pew Research reports that 86% of Americans are familiar with cryptocurrencies, while 16% say they have invested. The reason more people haven’t invested? They don’t fully understand it. This is a huge growth opportunity for banks to partner with account holders as a trusted voice of information, within the confines of current regulations.
- Use account holder transaction data to spot trends in cryptocurrency purchases within their ecosystem and inform them on how to communicate and educate account holders.
- Task an employee to become the in-house cryptocurrency expert, in the ins and outs of crypto’s current and future state.
- Develop a section on the website with information for account holders.
- Create an email campaign that shows account holders a history of investment product adoption with links back to the bank’s website for resources about the latest news on cryptocurrencies. Even if the institution doesn’t facilitate sales, it is important to set the institution up as a trusted resource for industry data.
Crypto fraud is rampant because the majority of people still aren’t quite sure how crypto works. That’s why it’s so important for financial institutions to be the source of truth for their account holders.
Further, fintech is already in the crypto arena. Ally Bank, Revolut, Chime and others are working with their account holders to help facilitate crypto transactions. And even established institutions like U.S. Bank are offering cryptocurrency custody services.
Data will be an important key. Pew Research reveals that 43% of men ages 18 to 29 have invested in, traded or used a cryptocurrency. But what does that mean for your specific account holders? Look closely at spending data with a focus on crypto transactions; it’s an extremely useful metric to use for planning for future service offerings.
The role that traditional financial institutions will play in the cryptocurrency market is, admittedly, ill-defined right now. Many personal bankers and financial advisors feel hamstrung by fiduciary responsibilities and won’t even discuss it. But U.S. banking regulators are working to clarify matters, and exploring CBDC, in 2022.
Is cryptocurrency the future of money? Will a digital dollar overtake it? It’s too early to tell. But all signs point to the wisdom of banks developing a crypto and CBDC strategy now.