Banking Briefing: What Biden’s executive order means for crypto growth
- With Biden’s executive order showing more interest in crypto development, the next question is what does that mean for the future of banks and digital currency?
- Meanwhile, fintech bank charters are heating up. But that’s not necessarily a bad thing for incumbents.
President Joe Biden signed an executive order early this month which demanded the government examine the potential effects of cryptocurrencies on the economy – both positive and negative. The order includes looking at things like
- Financial inclusion
- Responsible innovation
- Illicit activity
- US competitiveness
- Consumer protection
- Financial stability
On top of that, the Biden administration wants to look into the potential of a digital version of the US dollar.
In terms of what this development means for the crypto industry, Tal Elyashiv, founder and managing partner of Spice VC, a VC fund in the blockchain and tokenization ecosystem, the move is “long overdue.”
“I strongly believe that in the long run this is extremely positive for the crypto market and is absolutely necessary to allow them to grow further, mature and be more accessible to institutional investors,” said Elyashiv. “It will eventually make crypto investing more accessible also to retail investors. All this spells more potential growth for crypto markets.”
Still, he also thinks it may be a while before we see any solid results manifest.
“The house seems almost evenly divided on the necessary legislative changes. And although I hope I am wrong, I think that this will limit the pace and extent of progress that can be made in the US in the short term.”
Banks may also be feeling positive about the move, as more crypto embracing actions make the news. Since late 2021, more major banks have been treading on crypto grounds.
In October, Bank of America launched its cryptocurrency research division, which covered DeFi, NFTs, Bitcoin, and central bank digital currencies. The publication signaled the bank’s move to going beyond just Bitcoin, and exploring other cryptocurrencies as well.
JPMorgan Chase, meanwhile, has been investing in blockchain-focused companies. Its dabbling in the metaverse is another pro-crypto move the bank has made.
Finally, last week, Goldman Sachs executed an over-the-counter crypto trade – becoming the first major bank to do so. Last year, it also re-launched its trading desk for cryptocurrencies.
The Bank Policy Institute, meanwhile, has applauded the idea of bringing clarity to the rules surrounding cryptocurrency. According to them, the move opens the door for banks to further explore expanding their own digital offerings.
As for exploring the potential of a US digital dollar – lots of banks may be more concerned on that front:
“While much of the executive order calls on federal agencies to assess the expanding marketplace of digital assets before recommending new rules, we are concerned that it clearly directs federal agencies to begin pursuing a central bank digital currency even before determining if a U.S. CBDC is actually ‘in the national interest’ as the order also requires. We urge the administration and the agencies involved to carefully consider the implications of a U.S. CBDC, which could fundamentally reshape our banking and payments system to the detriment of bank customers and their communities.” – Rob Nichols, President and CEO of the American Bankers Association, in a press release
In an article he wrote for Harvard Business Review, Dr. Ajay S. Mookerjee, a senior fintech adviser to global investment firm Warburg Pincus and founder of Fair Square Financial LLC, says that the main issue for banks is CBDCs’ potential for disrupting the traditional banking model.
The model relies on the idea that customers deposit money they’ve earned into the bank and the bank uses these deposits to make loans. Around 10% remains available for customers to take out in the form of cash. Banks make money off the difference between the interest they pay depositors and the interest they make off of loans.
CBDCs could potentially restructure the order of things. CBDCs have an unchanging digital identity and are a direct liability of the central bank. That makes them a safer form of currency than commercial bank issued digital currency.
This would mean customers choosing CBDCs over either forms of digital money. According to Mookerjee, “The situation is equivalent to a scenario in which every citizen has, in essence, a checking account with the Central Bank.”
What role would commercial banks then play?
'You can’t make decisions about crypto if you don’t understand it': Three questions with Marcell King, Chief Innovation Officer of Payveris, on the new executive order
Marcell King is the chief innovation officer at Payveris, which works with hundreds of financial institutions to optimize digital money movement.
At this point, says King, an executive order surrounding crypto is more of a symbolic badge for the digital currency industry. As for fintechs and incumbents: there are ways they can benefit from this as well -- that is, if they take the time to educate themselves.
How FIs take advantage of Joe Biden’s latest executive order?
It's too early to do anything specific related to the order. At this point, there's a lot to sort out by the various agencies that will be involved in responding to the order. That said, the order is symbolic: it legitimizes crypto currency as an important thread in the future fabric of global commerce. I think it's imminent that the US will have a CBDC at some point in the near future.
What I would recommend is that FI executives 1) get a clear understanding of what crypto currencies are and how they work 2) understand the value of crypto currencies in commerce -- as assets, collateral, and currency -- and 3) start thinking about how a CBDC will affect their business
A lot of executives at FIs don’t understand cryptocurrency very well, but you can’t make decisions about crypto if you don’t understand it. It’s important for financial institutions to really look into the value of crypto to the consumer and the industry, and how it can apply to their internal bank services.
How does current government regulation affect FIs, DeFi and other cryptocurrency companies differently?
The goal of government regulation in the financial services space is to insure that consumers, businesses and investors are protected from unfair and unethical business practices, systemic risks, and bad actors.
FIs have been regulated since the beginning of time and they have to manage risk. Therefore, they have to diligently balance the speed at which they innovate with the overhead associated with remaining in compliance with the regulatory agencies that oversee them and the risks involved with launching a new service.
Cryptocurrency companies are in the adolescent stage of regulatory oversight and therefore can move and create services much faster but with a much higher risk to consumers, business, and investors because they don't have the same level of oversight. Over time, cryptocurrency companies will have similar levels of regulation, but will be much more stable and safe for consumers, businesses and investors to invest, hold, or exchange as a currency.
While FIs are currently subject to more regulation and cannot move as fast as crypto companies or neo-banks, traditional FIs still have the inherent advantage of a higher level of trust which gives them the advantage over crypto companies in the long run. It’s inevitable that FIs will lag behind a little and that’s okay, because consumers know they can trust institutions with their money, and that’s what traditional FIs provide.
What does more government regulation mean for the cryptocurrency industry as a whole?
The volatility that comes with a completely decentralized and unregulated system of cryptocurrency brings about a large amount risk, which is why you see high volatility in crypto currency values.
In the numbers: fintech bank charters
According to research by Klaros Group, there seems to be a steady rise in charter applications. While not as high as the pre-2007-2008 financial crisis period, it’s still higher than the decade that followed.
As fintech continues to boom, the benefit of a bank charter is becoming more pronounced. According to Michele Alt, partner and co-founder at Klaros Group, the move can give these companies a bunch of benefits, like insured deposits and preemption of state laws. It also helps them avoid risks that come from working with a partner bank.
“A shift in a partner bank’s business strategy or regulatory problems encountered by a partner bank could derail a fintech’s business through no fault of its own,” said Alt.
2020 was an exceptionally strong year in terms of new applications. That had to do with what Klaros Group refers to in its research as the ‘Brooks Effect’. While Brian Brooks was acting comptroller of the currency, he signaled an openness to fintech charter applications. And that set off the chain of applications.
While 2021 didn’t see as much application action as the year before, Andreas Westgaard, director at Klaros Group, says fintechs’ interest in charters isn’t going away.
“While fintech interest in national bank charters waned in 2021, in part due to regulatory headwinds at the federal level, many applicants looked for alternative paths to approval either at the state level or through acquisition strategies,” said Westgaard.
In January, SoFi was approved for a US bank charter. Square Financial Services, meanwhile, was approved in March last year. Still, Alt warns fintechs should evaluate their exposures to various risks before applying for these charters, including whether it can recruit a seasoned bank management team in time, manage the financial side of the application, and have enough patience to go through the motions of applying.
“Getting a bank charter is not for everybody, and a fintech should first consider its readiness to meet bank regulatory standards,” said Alt.
Regardless, the growth in applications has been sounding an alarm for incumbent banks – many are against granting charters to these fintechs. But Alt says this is actually a mistake.
“Banks should insist on - rather than resist - the granting of new charters to fintechs. Doing so would level the playing field, provide important safeguards, and promote healthy competition that will benefit consumers,” she said.
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