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Why cryptocurrency may be exactly what your bank needs now

With Super Bowl ads featuring celebrity spokespeople, at least one sovereign nation (El Salvador) accepting Bitcoin as legal tender and the Biden administration recently announcing an executive order for promoting “responsible digital asset innovation,” the wild world of cryptocurrency has gotten a lot more conventional.

Crypto is no longer the currency of outliers and speculators alone. In the United States, at least 16% of adults have invested in, traded or used cryptocurrency, according to a 2021 survey from the Pew Research Center.

For financial institutions that are not yet equipped to handle digital assets, consider this a friendly notice that now is the time to get up to speed.

Existing crypto exposure

At this point, it is almost impossible to be in banking and not already have at least some type of crypto risk exposure. With so many Americans interacting with digital assets, nearly every institution has sent money to companies dealing in crypto, whether they know it or not.

Preparing for the future wave

Even though the United States isn’t quite ready to issue its own central bank digital currency, financial institutions should be laying a foundation by building the technical infrastructure to able to handle that kind of banking in the future. Right now, they should consider giving their employees a better footing in the digital asset space by educating them and providing them with experience in facilitating transactions in stablecoin and transacting in crypto.

Risk and strategic assessments

Crypto may be less wild in many ways, but it’s still a complex arena. To help institutions get a clearer picture of how they can incorporate and capitalize on digital assets, they should engage a trusted third party with established experience in assisting other organizations in making the leap.

An outside party can perform a risk assessment and look at the institution’s corporate strategy to fully understand its internal skills and technological capabilities as well as its deficiencies. They can help an institution identify the kinds of products and services its customers want in addition to what fits the institution’s risk appetite. Further, they can help the bank get to the point where it can start offering those products and services, making certain they are structurally prepared as an organization.

Reasons to start assessing now

Although the transition may seem daunting, traditional banks understand the market and its demographics are shifting. As in every industry, innovation is key to growth, and the early adopters among financial institutions will have a leading edge in pursuing younger customers, who need financing for buying a car or home.

A path to serving the unbanked

Crypto also addresses challenges for people in underserved communities. Without nearby banking facilities, certain populations have no access to the financial products and services needed. In the world of digital assets, if they have a smart phone, they can get a crypto account.

Providing another avenue to the unbanked was one of the reasons the Biden administration issued its executive order. Another is to make the crypto world safer for a broader population.

Transparency for cybersecurity and regulation

In the past few years, the U.S. government has intensified its cybersecurity efforts, particularly through the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). While there is not full transparency in who is behind certain wallet addresses, law enforcement agencies and crypto intelligence companies are able to see a lot more than they used to. For example, if a business is given a ransomware demand and is told to send digital assets to XYZ address. Law enforcement, with the support of key digital asset industry experts can trace that payment throughout the ecosystem and may be able to access or freeze the funds. In the meantime, it can also see every transaction XYZ has done and with which wallet addresses since it is all recorded on blockchain.

Again, crypto still has some anonymity but the safeguards and services in place to help protect or support investors, institutions, regulators and law enforcement is expanding.

Speed and efficiency of transactions and processes

Despite more regulations on the horizon, financial institutions should consider the potential benefits of crypto. In addition to seeing a way to reach new customers, they will also see a quicker way of doing business. Blockchain technology allows banks with their own stablecoin the ability to process transactions with digital asset companies faster than traditional banking infrastructure. There are still parts of banking that require manual intervention or processing, but certain processes may be made more efficient through the blockchain technology underlying digital assets.

Moving into the digital asset world isn’t simple and it isn’t without risk, but with the right help, it may become a source of innovation, new products and services. Regardless, the longer you wait to assess how crypto fits into your institution's strategy, the more likely similar institutions may bring their new products and services to the market.

Todd Olson
Director
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