What role can traditional financial services play in the crypto universe?

Cryptocurrencies are going mainstream, but growth will be faster once traditional banks fully enter the fray. Michal Ruparel of banking circle explores the latest research from Payments Bank and how banks can accelerate crypto engagement by working with third parties.

Commonly considered a relatively new concept, the idea of ​​cryptocurrency was actually first conceived in the Netherlands as early as the 1980s. It wasn’t until 2009 that Bitcoin was launched and quickly became the most widely used cryptocurrency. Progress on the new currency has been slow, despite rapid advances in technology that allowed most households to access crypto if they wanted to.

Cryptocurrencies were designed to enable bankless payments. But this perceived advantage might be exactly what has held crypto back from the mainstream for decades. The regulation and legacy that crypto has sought to circumvent — to make payments faster, cheaper, and more convenient — also provides customers with vital protection and stability that engenders trust.

However, recent research reveals that the use of crypto is growing faster than ever before, with total transaction volume reaching $15.8 trillion in 2021, up 567% from 2020. Around 300 million people now hold crypto around the world and 75% of users would like to use crypto to pay for goods and services.

As non-bank financial institutions (NBFIs), including crypto exchanges and specialty acquirers, have embraced the move to crypto faster than banks, the acceptance network is widening and banks are increasingly entering more in the world of crypto.

Many central banks, including those in the EU, Canada, Sweden, China, Brazil, the US, and the UK, are actually developing their own digital currencies. These central bank digital currencies (CBDCs) promise many of the benefits of crypto, but much lower volatility since they are digital versions of national currencies backed by government pledge. Likewise, “stablecoins” linked to assets such as fiat currencies or more established cryptocurrencies are less volatile than traditional cryptos such as Bitcoin or altcoins, thus reducing risk.

However, there are still hurdles that need to be overcome for crypto to become more accepted by traditional banks.

Absent banks

The continued volatility along with the high proportion of criminal crypto users means it far exceeds the risk appetite of most banks. And that’s especially the case when you consider how regulators began to see banks as more of a target after the 2008 financial crisis.

The crypto industry itself is working hard to increase fraud detection and improve anti-money laundering systems and has already reduced crime significantly in recent years. With improved security, the emergence of a consistent regulatory environment, and improved stability of CBDCs and stablecoins, we are moving into a new phase in the evolution of crypto. Now is the time for banks to get on board, or they risk having to catch up later.

Due to their direct engagement with the clearing and settlement system, enduring consumer trust, and experience in shaping consumer protection regulations with governments, banks hold a significant advantage over NBFIs. to fuel the widespread use of digital currencies. As such, crypto acceptance, transaction, and settlement will undoubtedly grow faster when banks play their part in full. But banks need to develop a solid approach to crypto that helps them stay ahead and build a competitive offering.

Climb on board

Stablecoins are already accepted as legal tender by major payment networks such as Mastercard, Visa and PayPal, demonstrating their clear passage into the mainstream. As stablecoins and CBDCs become more widely accepted and used, banks’ customer relationships and high levels of trust mean they are likely to play an increasingly important role.

To prepare for the widespread adoption of digital currencies, banks should work with third parties as part of their ongoing digitization strategy, to develop payment service infrastructures that can seamlessly intersect with crypto exchanges and the wallets. This will help them add value for customers and generate revenue by acting as a bridge between fiat and crypto environments.

Expert third parties could handle technical and regulatory issues, helping to provide a seamless end-to-end experience for bank customers looking to use stablecoins and CBDCs. As crypto continues to grow in popularity, banks should prepare for a much wider spread of stablecoins and CBDCs over the next two to three years. These currencies, more stable and secure than they are, will soon overtake the more volatile classic cryptocurrencies including Bitcoin and altcoins. Hard to imagine today, perhaps, but it’s also possible that CBDCs will soon begin to replace pure fiat currencies, especially for digital payments.

Clearly then, any bank without a cohesive crypto strategy risks being quickly left behind and forced to catch up.

Next steps

Join the Banking Circle webinar on June 23 to learn more.

A panel of experts from Banking Circle, Ripple, Mode and Kraken will discuss where banks are in the crypto adoption cycle and what’s next for them. Topics will include:

  • What does the growth of crypto mean for traditional financial services and where are they in the crypto adoption cycle?

  • How can banks add value in the crypto space and what obstacles are holding them back?

  • What is the role of DeFi and what is the impact on banks?

  • What’s next for banks and crypto?

Register here to participate in the webinar.

About Mishal Ruparel

Regional Managing Director, APAC, Mishal is part of the founding team of Banking Circle, an EQT-backed global financial infrastructure serving financial institutions worldwide. As a member of the management team, he was responsible for leading the global sales organization before moving to Singapore where, as Managing Director, APAC, he is responsible for the expansion of Banking Circle in the APAC region. With a career spanning over 17 years in banking and fintech, Mishal has held leadership positions spanning international business development, strategic partnerships and corporate finance globally for organizations such as FIS WorldPay , Barclays Bank and Fiserv.

About the banking circle

Banking Circle is a fully licensed, next-generation payment bank designed to meet the global banking and payment needs of payments businesses, banks and online marketplaces. Banking Circle solutions power the payment propositions of more than 200 businesses, financial institutions and regulated marketplaces. Banking Circle is fully focused on providing a payment solution for payment companies, banks and online marketplaces that is invisible to end users but will enhance their customer proposition – with no upfront investment in changes to systems or processes.

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