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Bankchain Briefing: How is crypto adoption impacting incumbents?

  • This week, we explore how growing crypto adoption is impacting traditional financial institutions, and how some of them choose to react.
  • We also look at the opportunities for financial services in Decentraland.

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Bankchain Briefing: How is crypto adoption impacting incumbents?

2021 was a game-changing year for the crypto industry, with record gains in global blockchain funding, investor interest, as well as digital asset ownership among consumers.

The share of US adults who report owning crypto is now roughly equal to those who own a certificate of deposit, according to a report by Morning Consult. Nearly one in four consumers (24%) report household ownership of cryptocurrencies.

2022 is expected to bring continued crypto adoption both by the general public, as well as on an institutional level by companies offering consumers the chance to buy, sell, store or spend cryptocurrencies.

But as adoption grows, how should leaders in traditional financial institutions react? Do they risk becoming irrelevant if they continue watching from the sidelines instead of actively participating in the crypto economy? Should they start educating themselves and their employees on crypto to keep up with consumers’ growing curiosity and interest? And how should they account for the 46 million US consumers who are planning to use crypto to make payments? 

I spoke with Seattle Bank’s Josh Williams to get his thoughts on this topic. Josh is currently the chief banking officer at Seattle Bank, and has previously held various leadership roles at Wells Fargo. With over 20 years of experience in banking, Josh has quite a few insights to share on how incumbent financial institutions should prepare for and tackle the growing adoption of crypto.

Here’s my conversation with Josh.

How is growing crypto adoption impacting traditional financial institutions? Are they taking the necessary steps to adapt?

While the adoption of crypto as an investment is rapidly being accepted by the public, financial institutions are still processing the risks such as inherent volatility, custody of crypto, as well as fraud, and money laundering. I do think we are going to see an increase in financial institutions providing crypto investment opportunities for their consumers, but most banks will rely on partnerships to manage risks, rather than transacting and holding.

For example, as Seattle Bank carefully ventures into crypto, we’re working with NYDIG, which has a strong custody model. Our relationship with NYDIG allows for investors to buy crypto assets, but not use those assets for transactions. I think we’ll see an increasing number of financial institutions establish these types of partnerships as they continue to evaluate the opportunities and risks of crypto.

What kind of infrastructure do FIs need to deliver crypto-based offerings? Are they sufficiently prepared to build this infrastructure in a timely fashion?

Currently, this is less of a tech infrastructure challenge and more so a challenge of understanding crypto. We need to start with understanding the first-order principles of crypto, namely that it allows for anonymous transactions. Provided an anti-money laundering convention emerges, the question will likely center on where and how to integrate into a payments scheme. That is going to require a thoughtful due diligence process. Banks that operate on open backend technology instead of legacy cores will have more choices for breaking into the crypto market. 

Should FIs train their employees on crypto to help them keep up with and understand the demands of consumers?

There are two areas where it’s important that we help our teams understand crypto: the first is that as a bank, we have a unique opportunity to help customers understand what crypto is, how to think about it as part of an overall financial plan, and what to be cautious about. Moving forward, crypto will largely remain specialized and experimental, and while crypto holds great potential, many of the underlying cryptocurrencies and use cases will quickly become obsolete. As a result, it’s important that customer-facing staff have basic familiarity with crypto, not necessarily to provide investment advice, but as an element of knowing our customers, their financial goals and strategies. Secondly, ensuring awareness among banking employees is critical to protecting clients and the banking system from money-laundering, fraud, and related credit or operating risks.

Can you share your thoughts on the growing interest around crypto's payment capabilities? And do you think the high volatility of most cryptocurrencies will prevent them from being used as a means of payment?

Without a doubt, volatility makes crypto a precarious payment medium. It’s important to remember, we’re in the early days — some call it the wild west — of crypto. Currencies that don’t achieve critical mass lack network effects and relevance and will likely fail. Those currencies that show stability, transparency, and security will become reserve currencies – like the US dollar or Euro among fiat currencies – which will make them more attractive for innovations in DeFi and smart contracts. As currencies transition to become reserve currency, the stability and the transparency aspects will grow exponentially.

It’s worth noting that the relative risk of crypto experimentation is lower in economies with less stable currencies and weak or inefficient financial systems. For these reasons, we would expect adoption to be higher in developing economies and cross-border transactions. Conversely, we can’t underestimate the regulatory challenges that will develop in advanced economies where risks of money-laundering are high, as illustrated by concerns surrounding Russia evading Western sanctions via crypto.

Crypto’s payment capabilities are something that we are keeping an eye on, but because of the high volatility, I think we’re still a while away from it becoming a mainstream form of payment. We know that people and businesses want consistency and dependability when it comes to payments, and until there is consistency in the value in crypto, only those who can afford the risk will enter the market.

How are FIs accounting for the 46 million US consumers who are planning to use crypto to make payments?

I believe this number says more about a lack of understanding of how crypto works than it does about the near-term impact on payments. That said, it speaks to the market’s openness, if not demand, for alternative payment solutions. To that end, right now we’re seeing financial institutions watch industry trends while also waiting to see what happens in the regulatory arena. 

If a CBDC is launched in the US, how will it influence the dynamics for FIs competing with fintechs and challenger banks that are already ahead of the curve?

If the US launches a successful CBDC, it will significantly level the playing field between banks and fintechs. Banks would no longer be at a regulatory disadvantage. We already enjoy the trust of consumers and investors, which is a huge advantage over challenger banks and tech firms looking to build that trust.

But banks will need to move quickly yet thoughtfully. This will favor those who are knowledgeable of the space, can readily integrate new solutions to their tech stack, and are comfortable partnering. We will see a huge influx of partnerships announced as banks look for speed to market. Similarly, in the event that CBDCs displace crypto, crypto companies may be looking for partner banks in order to continue serving their client base.

What happens in Decentraland…

With JPMorgan’s entrance into the metaverse, there’s a lot of discussion around opportunities for financial services to participate.

Decentraland is a 3D virtual reality platform that stands at the forefront of this growing metaverse trend. It’s decentralized and run by the community, providing full ownership to the users of their virtual assets. 

Inside, users can buy and sell goods and real estate, play games, interact, and trade with other users. They can make transactions using a crypto wallet.

Decentraland got a major boost when its native token MANA jumped 80% within 24 hours to a market capitalization of more than $2 billion, following the announcement that Facebook would rebrand to Meta, as the company shifted its long-term focus from social media to 3D virtual environments in 2021.

This year, JPMorgan Chase became the first bank ever to enter the metaverse with its ‘Onyx Lounge’ in the Metajuku mall, Decentraland.

A few crypto firms like Binance have also established their digital headquarters in the virtual world for meetings and collaborations.

Decentraland appears to be an early hub for entertainment activities and economic boom in the metaverse. It has Sotheby’s London art gallery, museums, virtual events like the Paris Hilton concert that happened on New Year’s Eve, as well as token-based gambling.

Lands and plots are needed in the digital world to launch a business, game, or fashion store, build a house, or organize an event. Buying, selling, and mortgaging these lands is a popular financial activity happening in the digital world.

Between June and December last year, the average price of virtual land doubled from $6,000 to $12,000 across the four main Web 3.0 metaverses that include Decentraland, The Sandbox, Somnium Space, and Cryptovoxels – according to a recent JPMorgan report

$500 million in virtual land sales was executed in the metaverse last year. Brands buying up space to create virtual stores and other experiences are the reason virtual property prices are going through the roof.

The metaverse will become a $1 trillion market opportunity in yearly revenues, given that its virtual worlds will “infiltrate every sector in some way in the coming years,” claims the JPMorgan report.

What we’re reading

  • Visa looking to hire college students to develop in-house crypto talent (CoinDesk)
  • Bain Capital Ventures launches $560 million crypto fund (Bloomberg)
  • Biden's executive order draws mixed reactions from global crypto community (CoinDesk)
  • State Street inks institutional crypto custody deal with Copper (The Block)
  • eBay teases ‘digital wallet’ in investor presentation as crypto rumors swirl (CoinDesk)
  • JPMorgan expands crypto footprint with investment in blockchain firm TRM Labs (Yahoo Finance)
  • Goldman Sachs offering ETH fund to clients through Galaxy Digital (CoinDesk)
  • Watchdogs are divided over opening up retail risk of crypto funds (FT)
  • Papa John’s plans NFT drop despite prior warning from UK advertising regulator (CoinDesk)
  • Circle launches business accounts for USDC transactions (Cointelegraph)

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