How companies like Paxos bridge the gap between traditional and blockchain-based finance
- Traditional financial infrastructure is now considered old technology, and blockchain infrastructure developers want to step in to help design an ecosystem that works for the modern day consumer.
- Many financial institutions are now growing more comfortable with the crypto world, eager to participate in this market through partnerships with blockchain vendors.
Blockchain infrastructure companies like Paxos are imagining a new financial system integrated with blockchain technology, and they want to be a part of building the foundation for it.
Traditional financial infrastructure is now old technology, whose processes don’t scale to modern day demand. Consumers expect money to move 24/7, and the existing rails can’t support that.
“Bridging the technology gap, the security gap, the regulatory gap with the current constraints that traditional institutions probably have from a resourcing standpoint means that they almost have to go through a partner – that's a strategic decision they have to make,” said Mike Coscetta, head of revenue at Paxos, a global blockchain infrastructure platform.
Initially hesitant, most financial institutions are now growing more comfortable with not doing this by themselves, realizing that they can partner with a blockchain vendor in a compliant and secure way. And having waited on the sidelines for quite a while, they’re now eager to board the blockchain train.
“Now that the industry is evolving very quickly and becoming much more mainstream, a lot of them are finding themselves behind the curve. There's a bit of a scramble to be able to move faster into this space than they expected a year or two ago,” he added at Tearsheet's inaugural Bankchain Conference.
Many companies start with crypto brokerage as their first entry into the market, to allow their end customers to be able to buy, sell and hold crypto. This is what fintechs like PayPal and Venmo, Revolut, Interactive Brokers started to do in partnership with Paxos, in a regulated manner. Some fintechs then start to evolve into payments, settlement layers, or even BNPL.
Traditional financial services companies usually steer away from new technologies and let the rest of the industry evolve and experiment in that direction – it’s not the type of industry that could have dived in headfirst during the early adopter/disruptor phase, Coscetta argued.
But two years ago, that started to shift.
“Large financial services companies started losing market share, deposits, users, and definitely losing share of attention among the next wave of high-target users and depositors in their institutions. They all now want to participate in some capacity, but it has to be done in a very transparent regulated manner,” he said.
Traditional finance wants to have more skin in the crypto game, giving rise to a “middle” sector of blockchain-based infrastructure services connecting the two worlds.
This is where companies like Paxos operate, making a bridge between traditional finance into blockchain finance “not only in a regulatory compliant manner, helping them transform the same type of operating model in a brand new era of financial technology,” he said.
So Paxos now offers crypto brokerage services not just to PayPal and Revolut, but also large banks like Credit Suisse and Societe Generale.
For banks and large financial institutions, regulation and compliance is very important, and this is driving a solid core expectation from infrastructure vendors as well. Regulation provides the guardrails on which to operate, Coscetta said, plus clear rules to the game.
“Regulation is non-negotiable. It's not something that's nice to have, or a value add – it's just the only way you will be able to do business when connecting these two worlds,” he added.
Having crypto becoming more mainstream and better understood by regulators could also smooth out a lot of the volatility – bringing a little more predictability into the market and more stability as a result.
“The clearer those lines can be drawn, the more likely you are to bring new participants into the market – take some of the late adopters and bring them in because this world will start to look more familiar to them. And I think there is a fair way those lines can be drawn,” Coscetta said at the conference.
There are many opportunities for financial institutions to meet more of the demands of the modern consumer by using blockchain financial infrastructure – whether it’s faster payments, enhanced security or streamlining processes to eliminate fees, all for the benefit of the end customer.
“In the future, people will be able to move assets of all types anytime, anywhere – there’s no constraint in being able to do that. That's our vision of the world,” Coscetta said.