Payments

Cheatsheet: How banks are using cryptocurrency

  • While banks may not publicly be endorsing cryptocurrencies, they are working behind the scenes to adapt to a world where they will play a bigger role in financial services
  • Key uses for cryptocurrencies include cross-border payments and securities trading
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Cheatsheet: How banks are using cryptocurrency

We’ve come quite a way since JPMorgan Chase’s Jamie Dimon called bitcoin a fraud last year.

Cryptocurrencies are slowly becoming part of the narrative of how financial services will take shape — and bankers are coming on board. Payments, particularly cross-border payments, are a prominent use case; bankers are also examining the roles they can play as investors increasingly want to trade in cryptocurrencies.

“Banks are interested in what capital markets will look like in the future, especially if cryptocurrencies are on an equal footing with fiat currencies,” said Brad Bailey, research director at Celent. Bankers are examining scenarios where the issuance of securities in the cryptoworld increasingly mirrors what’s happening in the traditional sphere, he added. Here’s a roundup of a few key examples of how banks are approaching cryptocurrencies.

Securities trading
Last month, Tearsheet reported that Goldman Sachs hired crypto trader Justin Schmidt to help the bank figure out its crypto strategy. The bank later confirmed that it will launch a cryptocurrency trading desk; it will initially use its own money to trade with clients in contracts linked to the price of bitcoin while it figures out how it can get regulatory approval. Meanwhile, others in traditional financial services have been incorporating cryptocurrencies for six months; offering products that incorporate cryptocurrencies that are accessible to everyday investors. For example, in January, Morgan Stanley began clearing bitcoin futures for institutional clients.

As banks approach the evolution of crypto trading, two key risks need to be worked out, including regulatory uncertainty and volatility of asset prices.

Cross-Border Payments
Cryptocurrencies like Ripple’s XRP can act as bridge assets to resolve the traditional foreign exchange system’s time-consuming and expensive “nostro accounts” problem — when correspondent bank accounts eat up time and money throughout the exchange process and generate holding fees. Using Ripple, currency is converted to XRP en route and then changed again to the destination currency, a process that takes seconds. Ripple counts more than 100 financial institutions globally as customers, including over a third of Japanese banks. By building the groundwork in Asian markets, U.S. institutions will be encouraged to sign on, the company’s vp of product, Asheesh Birla, recently told Tearsheet. The company doesn’t allow XRP fluctuations to influence its strategy, he added.

Beyond cryptocurrencies, blockchain technology is simplifying payments for retail banking customers. Ripple’s software is being used to tokenize payments for retail customers. In April, Spanish banking giant Santander launched One Pay FX, a mobile payments service for its U.K. debit card holders who want to send payments to people in Euro Zone countries and the U.S. It’s the first market-ready blockchain technology. It doesn’t use XRP; instead, it uses Ripple’s xCurrent protocol, which is Ripple’s software that allows banks to instantly settle cross-border payments with end-to-end tracking.

Loans
German online bank Bitbond, announced Monday that clients can now transfer loans across the world using bitcoin — bypassing the Swift network. Bitbond uses bitcoin as a bridge asset before converting the loan amounts into the destination currently. Clients hold the loans in bitcoin for seconds or minutes until they are exchanged back into the destination currency — allowing the bank to lend to customers around the world at lower rates.


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