‘There’s a two-sided integration going on between fiat and crypto’: How banks are gearing up to move into digital currencies
- Many banks are starting to incorporate digital assets into their services.
- Further adoption will depend on how federal agencies perceive and regulate the large-scale use of cryptocurrencies.
Recently, banks in the U.S. have started to dip their toes in the digital asset economy and offer crypto-related services. Examples include the country’s biggest banks such as JPMorgan, Wells Fargo, Morgan Stanley and PNC Bank setting up crypto investment funds for their clients, as well as smaller players like Quontic Bank offering Bitcoin rewards on debit card purchases.
With the global market cap of cryptocurrencies surpassing $2 trillion, they represent a major opportunity for banks. But perhaps more than just an opportunity to cash in on, crypto may actually become an important strategy for maintaining market share and staying relevant.
Banks are currently witnessing the withdrawal of sizable deposits from their accounts by customers who are making investments in crypto assets. Consumers are moving their funds away from stocks, bonds, and cash held in their banks in order to buy Bitcoin, Ethereum, Cardano, and other major coins on crypto exchanges.
“Many of the big banks are losing market share to these crypto investments,” said Nathan McCauley, co-founder and CEO of Anchorage Digital, at a session held during Tearsheet’s Convergence Conference 2021. “There’s a loss of business taking place that these banks would like to mitigate over time. This is an important reason why banks want to get involved with digital currencies, so they can regain some of their lost market share.”
Areas of intersection for traditional finance and crypto
Beyond the crypto investment services being offered by many of the major U.S. banks, there are a number of use cases and crossover products emerging that link together the seemingly disparate worlds of traditional finance and crypto.
Probably the most recent example of this crossover is the launch of a crypto banking service by Vast Bank, an Oklahoma-based bank that became the first federally chartered institution in the country to allow its customers to buy, sell and manage cryptocurrencies alongside a traditional checking account. If successful, this may prompt other banks to launch similar services in the future.
Another trend that has gained momentum among banks recently is that of lending against crypto assets. A few months back, Anchorage Digital collaborated with BankProv (formerly The Provident Bank) to offer Ethereum-backed loans, allowing institutional investors to use their Ethereum as collateral for USD loans without having to liquidate their holdings. Anchorage is looking to expand this program substantially in the future, with plans to add many more banks over the coming years.
“Banks throughout the country want to get into the crypto-collateralized lending business. It’s a really interesting model where the new on crypto meets the old on collateralized loans,” said McCauley. “It’s also a good way for banks to earn yield, and ends up being a nice additional source of revenue for them.”
Another notable development is a growing level of awareness among major financial institutions around the usefulness of stablecoins. For several months, Visa has been working with Anchorage to settle transactions in USDC. Anchorage acts as a stablecoin settlement agent for Visa, enabling direct USDC-to-USDC transactions anywhere on the Visa network, without the need to convert to fiat currency. In the future, this technology could be adopted by banks for making stablecoin transactions as well.
McCauley believes there may come a time in the not-so-distant future where, much like stablecoins, securities and equities could be represented on blockchains and settled instantly. This would enable the industry to build a set of clearing and settlement services that could substantially reduce counterparty risk. “We’re very early in that process right now, but it looks like a way to not just take blockchain-based assets and bring them into the real world, but also take the existing world and bring it onto the blockchain,” he said. “There’s a two-sided integration going on between fiat and crypto, and it’s pretty exciting to look at what is possible there.”
What’s the hold-up?
If getting involved with cryptocurrencies is profitable for banks, why has adoption been so slow?
Having spoken to executives from large as well as regional banks around the country, McCauley says banks in the U.S. have already started thinking about their crypto strategy, and most are quite clear on how they would like to incorporate digital assets into their services. The main obstacle at this point seems to be the uncertain and mostly unfavorable regulatory climate.
“The hold-up is that it actually takes quite a lot of time and work to introduce anything new in a bank,” said McCauley. “Whether it's internal sign-offs, getting the technology integrated, or due diligence on the service providers, there’s an incredible amount of complexity on the regulatory, legal and compliance fronts.”
Going forward, it looks like further adoption would largely depend on how federal agencies view the digital asset industry, and how receptive they are to banks offering crypto-related services. McCauley believes that if regulatory bodies such as the IRS and the Federal Reserve are too restrictive, blockchain-based innovation will likely move away from the U.S. to other countries with less stringent policies. This could make it a challenge for the U.S. to maintain its current global financial influence.
An encouraging trend this year has been the granting of conditional banking charters to a number of crypto-native firms by the OCC. Anchorage Digital became the country’s first federally chartered digital asset bank in January, and was soon followed by Protego in February, and Paxos in April. Last month, Circle, principal operator of USDC, filed to become a full-reserve commercial bank and is currently awaiting approval from the OCC.
McCauley believes this is a positive trend with industry-wide implications that could give much-needed legitimacy to cryptocurrencies within finance. “The fact that there are banks operating at the national level that are able to hold digital assets – that’s an incredibly positive signal to the whole industry,” he said.
“There is now a certain legitimacy to this asset class, since there are federally regulated ways to hold these assets. This is a win for the crypto industry overall, and hopefully an indicator of more positive things to come in the space.”