Cryptocurrencies and Digital Ledger Technologies (DLT) have become topics nearly impossible to measure. Innovations come hourly, as do the challenges.
Cryptocurrencies that were once derided as at best a fad, or at worse a scam or way to launder money, have become a legitimate asset class reaching three trillion dollars in 2021.
A few highlights from 2021:
- Consumer adoption of crypto as an investment somewhere between 25-30% of adults represents 2.5% of the $120 Trillion Global Equity market.
- Institutional investment in crypto has increased exponentially, with more than 50 U.S. companies holding crypto on their balance sheets and even more accepting crypto as a means of payment (including over 40 million PayPal merchants).
- Companies like Flexa have emerged that allow spending crypto at the point of sale, completely bypassing the traditional network rails – with potentially significant impacts on merchant fees and interchange.
- Venture capitalists have invested $30 billion into crypto startups this year – more funding than the sector has received every other year combined (the previous high was $8 billion in 2018). “Investors are funding anything and everything” crypto-related, according to PitchBook analyst Rob Le.
- Regulatory guidance has been provided from the Office of the Comptroller (OCC) and National Credit Union Administration (NCUA) – clearly allowing financial institutions to move into digital asset technologies.
- We’ve seen credit unions announce and several banks launch crypto/DLT solutions. One bank observed a 25% increase in its customer base eight weeks after its crypto product launch. We’ve also observed several financial institutions mint and leverage stablecoins for instant settlement 24x7x365.
- Several major announcements have been made about Central Bank Digital Currencies as the world’s central banks scramble to keep up with China’s digital asset initiatives.
Cryptocurrency is here to stay, adoption is accelerating, and it offers opportunities for financial institutions willing to try something new. It certainly appears the largest risk facing financial institutions is not having a crypto/DLT strategy.
Most financial institutions observe their deposits flowing out to the crypto exchanges, and most financial institutions are unsure about what to do. Those under 35 are already active in cryptocurrency. Banks and their wealth advisor arms must be active this year or potentially lose this population segment.
We’ve observed new crypto solutions coming to market that promise a solution via a partnership between the crypto solution providers and popular mobile banking and processing partners.
While these solutions promise to make offering crypto to clients easy and offer “white glove” service, the reality of how competitive these solutions will be with the crypto exchanges, fintechs, or early bank competitors remains to be seen since most of these solutions only offer a buy/sell/hold Bitcoin only option.
Will these solutions really be competitive to the existing crypto exchanges, or might it be better to launch a more elegant solution? The reality is that the crypto solutions you select today need to be competitive, scalable, and consider future solutions (like loans against those digital assets) your clients will ultimately request.
Several potential crypto product solutions can be brought to market, but they will need to be considered in the broader context of your institution’s digital strategy and long-term roadmap.
Some of these solutions include:
- Custody and trust
- Trading and investment alternative/advice
- Rewards and gifting
- Considering digital assets in credit decisions
- Lending against cryptocurrency and to crypto businesses
- Decentralized Finance (DeFi)
Financial institutions must invest significant time in early 2022 to truly understand these new technologies against their competitive landscape. Key considerations include:
- Understanding the extent of your existing outflows to the exchanges
- Talking with your clients (especially the younger generation) to determine their current and potential future needs
- Ensuring your wealth and trust teams are fully involved
- Developing short and long-term digital roadmaps that include cryptocurrencies and DLTs
- Developing a product strategy to complement your broader strategy
- Understanding the various vendors, solutions, and technical considerations
- Having a good set of partners: technical, business, compliance, marketing, etc.
Crypto is here to stay. It is growing. And your bank needs to have a solid plan.
About the Author
Larry Pruss is SVP of Project Management at SRM (Strategic Resource Management). He has nearly 25 years of expertise in payments, developing strategies and plans related to card optimization, revenue enhancement loyalty marketing and portfolio acquisition. And he now leads the company’s cryptocurrency consulting offering for financial institutions.