In the 12 years that have passed since the world’s first Bitcoin transaction, digital payment systems have come a long way. Crypto and digital assets such as Bitcoin, Ethereum and Ripple make the headlines almost daily and account for more than a million transactions every day.
With more customers holding crypto and digital assets, banks can no longer afford to dismiss the crypto trend and must find ways to address those customers’ needs. The potential benefits extend beyond customer retention. Engaging with crypto and digital assets can provide banks with opportunities to reach out to new customers, differentiate themselves from competitors and find new sources of noninterest income.
As the scope of the crypto landscape has expanded, the debate over the banking industry’s place in it has intensified. Because of its historical role as a cornerstone of the broader financial system, many industry leaders contend that the banking sector has a logical role to play in bringing order and stability to the world of crypto transactions.
This contention is bolstered by the advent of stablecoins, which have values pegged to some other asset such as a fiat currency or a commodity. This feature seeks to reduce price volatility and enable more confident valuations so that stablecoins can be treated more like other intangible assets.
Proponents also note that banks clearly are capable of accommodating the crypto trend — just as they adapted to credit card processing, automated clearinghouse transactions and peer-to-peer payment systems.
While the broader industry sorts out its eventual role in the crypto world, individual banks face more immediate decisions about whether and how they should start accommodating crypto and digital assets. Opportunities abound — beginning with the provision of commercial banking services to companies that hold crypto assets or use them as a medium of exchange.
Beyond standard account services, some banks might choose to apply their expertise in payment processing and settlements to enable digital transactions. Banks with strong custody and wealth management operations might expand those services to accommodate crypto investments. Other banks could decide to accept digital assets as loan collateral.
More specialized, technologically demanding applications could prove feasible for some banks. Possible scenarios include providing merchant processing services using crypto assets, operating crypto ATMs and managing crypto reward or cash-back programs and other decentralized finance applications.
Developing Crypto Capabilities
The first step is deciding which of the various opportunities to pursue. Establishing a separate department or division is usually a poor strategy. A better course is to integrate crypto and digital asset capabilities into existing business lines.
Bank leadership teams clearly have an important role to play in guiding such decisions and should make sure that any venture into crypto and digital assets begins with a thorough strategic assessment. The goal is to identify the bank’s existing strengths and build in crypto components rather than forcing crypto capabilities into business lines where the bank might already be struggling.
Once executives identify promising opportunities, another critical early step is determining the best methodology for developing crypto capabilities. Large banks with extensive in-house technology resources might build their own applications, but most community and regional banks might find it more feasible to work with strong technology partners, including targeted fintech companies supporting the banks’ strategic goals
Risk and Compliance Issues
Risk and compliance uncertainty are common concerns underpinning hesitation among banks when it comes to developing crypto capabilities, given that the relevant regulatory, financial reporting, auditing and tax standards are still evolving. Yet banks can successfully mitigate the uncertainty through effective strategic planning and due diligence.
In addition, regulatory and advisory bodies are actively working to clarify the picture. Agencies such as the Office of the Comptroller of the Currency, the Federal Reserve Board and the Securities and Exchange Commission are crafting guidance or comment letters; financial reporting and accounting organizations are developing standards that will aid board members responsible for overseeing compliance.
With fintech businesses and other competitors eager to engage with crypto-oriented customers, banks cannot ignore the potential customer retention, brand enhancement and revenue generating capabilities of crypto and digital assets. By monitoring the evolving guidance and carefully evaluating the risks and opportunities, banks can pursue a balanced approach that capitalizes on the potential benefits while remaining consistent with their established levels of risk tolerance.