crypto strategy

Banks can jump aboard the digital asset bandwagon

Daniel Leeweb3 manager at banking circle explores the latest research from Payments Bank and examines how banks can accelerate crypto engagement by working with third parties

Cryptocurrencies are going mainstream and growth will be faster once traditional banks fully enter the fray. Commonly considered a relatively new concept, the idea of ​​cryptocurrency was first conceived in the Netherlands as early as 1980s. The 1990s saw major advancements in digital cash, such as David Chaum’s DigiCash, but 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 payments without banks, but this perceived advantage could be exactly what has held digital assets 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. Without it, customer base and potential growth are limited.

However, recent search reveals that crypto usage is growing faster than ever, with total transaction volume reaching $15.8 trillion in 2021, up 567% from 2020. About 300 million people today hold crypto worldwideand 75% of users would like to use crypto to pay for goods and services.

Source: Compliance Advantage

Where are the banks?

There are still hurdles to overcome for crypto to gain greater acceptance by traditional banks. The current volatility means that crypto 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 recent crash of TerraUSD Algorithmic Stablecoin, or UST, and the ripple effect the crash had on Bitcoin, Ether, and Tether, demonstrates how important it is for crypto to be fully regulated. It also clearly shows the opportunity for bank-based stablecoins tethered to fiat currencies to ensure they are more stable than Terra, which originally used a complex mix of code and its sister token, Luna, to stabilize the process. Since the crash, Terra has been redesigned as a block chain associated with the Luna token.

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. However, unlike cryptocurrencies, CBDCs are generally centrally controlled, so they do not offer the benefits of a decentralized governance structure. 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.

Regulate to succeed

Along with the improvement in risk, volatility and security, regulation in this area is also developing, which reassures banks. Throughout 2021, regulators around the world began rolling out legislation relating to the management of virtual assets, including crypto, covering investment rules and consumer protection. Leading the way, the United States has passed more than 20 pieces of legislation by the end of 2021 defining how cryptocurrencies should be treated in areas ranging from taxation to investment and payments.

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. They need to develop a strong web3 and crypto approach that helps them stay ahead and build a competitive offering.

It is important to note that due to their direct engagement with the clearing and settlement system, enduring consumer trust and experience in developing consumer protection regulations with governments, banks hold a significant advantage over non-banking financial institutions 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. Indeed, their overall lack of crypto to date may have hindered progress.

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. And, as stablecoins and CBDCs become more widely accepted and used, bank customer relationships and high levels of trust mean they are likely to play an increasingly important role.

Now, 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 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 web3 and crypto continue 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, 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.

So there is no better time than the present for the banks to join us. Any bank without a consistent web3 or crypto strategy will quickly be left behind and forced to catch up.

Banking Circle has published a white paper on the opportunities in the virtual asset market: “As Crypto Evolves, How Should Banks Approach CBDCs and Stablecoins?”

This editorial originally appeared in our Crypto Payments and Web 3.0 Report for Banks, Merchants and PSPs. The first edition of our report aims to provide a go-to payment resource on crypto terms and concepts for those who wish to understand the basics of crypto payments and their long-term impact. Additionally, it shares practical examples of cryptocurrency-enabled e-commerce and banking services and presents the latest developments in the regulatory landscape. Also, it reveals which are the most innovative companies in this space, which are building the crypto rails.

About Daniel Lee

Daniel Lee is responsible for web3 initiatives in Banking Circle and digital asset community relations. Formerly at DBS for 22 years, Daniel has extensive experience in the world of digital assets. Prior to DBS Digital Exchange, Daniel was Executive Director and responsible for electronic trading service intermediaries (broker-clients), digital exchanges, high frequency traders and market makers in the electronic trading space. He has experience dealing with various regulators and stock exchanges in the region and was also responsible for the ETF business.

About the banking circle

banking circle is a fully licensed, next-generation payment bank designed to meet the global banking and payment needs of payment companies, banks and online marketplaces. Banking Circle solutions power the payment proposals of over 250 regulated businesses.


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