Voice of the Industry

What role can traditional financial services play in the crypto universe?

Thursday 16 June 2022 08:04 CET | Editor: Claudia Pincovski | Voice of the industry

Cryptocurrencies are moving into the mainstream, but growth will be fastest once traditional banks step fully into the race. Mishal Ruparel of Banking Circle explores the Payments Bank’s latest research and how banks can fast-track crypto engagement by working with third parties.

Commonly considered a relatively new concept, the idea of cryptocurrency was in fact first conceived in the Netherlands as early as the 1980s. The 1990s saw some important leaps forward in digital cash, but it was not until 2009 that Bitcoin was launched, and quickly became the most widely used cryptocurrency. Progress for the new currency was slow, despite rapid technological advances that gave most households access to crypto if they wanted it.

Cryptocurrencies were designed to allow payments without banks. But this perceived benefit could be exactly what has held crypto back from the mainstream for decades. The regulation and legacy that crypto sought to swerve – to make payments faster, cheaper, and more convenient – also give customers vital protection and stability that engenders trust.

However, recent research reveals that crypto usage is growing faster than ever before, with total transaction volume reaching USD 15.8 trillion in 2021, up 567% from 2020. Around 300 million people now hold crypto worldwide, and 75% of users would like to use crypto to pay for goods and services.

Whilst non-bank financial institutions (NBFIs) including crypto exchanges and specialist acquirers have embraced the switch to crypto more rapidly than banks, the acceptance network is widening, and banks are increasingly stepping into the crypto world.

Many Central Banks including those in the EU, Canada, Sweden, China, Brazil, the US, and UK are, in fact, developing their own digital currencies. These Central Bank Digital Currencies (CBDCs) promise many of the advantages of crypto, but much lower volatility since they are digital versions of national currencies backed by government commitment. Similarly, ‘stablecoins’ linked to assets such as fiat currencies or more established cryptocurrencies are less volatile than classic crypto such as Bitcoin or altcoins, thereby reducing risk.

However, there are still hurdles to overcome for crypto to gain greater acceptance by the mainstream banks.

Absent banks

The ongoing volatility as well as the high proportion of criminal users of crypto has meant it is far beyond most banks’ risk appetites. And this is particularly the case when considering how regulators began to see banks as more of a target post the 2008 financial crisis.

The crypto industry itself is working hard to increase fraud detection and improve anti-money laundering systems and has already brought criminality down significantly in recent years. With security improving, a coherent regulatory environment emerging, and CBDCs and stablecoins improving stability, we are moving to a new phase in crypto’s evolution. Now is the time for banks to get onboard, or they risk having to catch up later.

Due to their direct engagement with the clearing and settlement system, enduring consumer trust, and experience in shaping consumer protection regulation with governments, banks hold a significant advantage over NBFIs in powering the mainstream use of digital currencies. As such, the acceptance, transaction, and settlement of crypto will undoubtedly grow fastest when banks play a full role. But banks must develop a sound approach to crypto that helps them stay ahead and build a competitive offering.

Getting onboard

Stablecoins are already being accepted as legal tender by major payment networks such as Mastercard, Visa, and PayPal, demonstrating their clear move into the mainstream. As stablecoins and CBDCs become more widely accepted and used, banks’ customer relationships and high level of trust means they are likely to play an increasing significant role.

To prepare for the widespread adoption of digital currencies, banks should be working with third parties as part of their ongoing digitalisation strategy, to develop payment service infrastructures that can seamlessly intersect with crypto exchanges and wallets. This will help them add value for customers and generate revenue by acting as a bridge between the fiat and crypto environments.

Expert third parties could manage the technical and regulatory issues, helping to deliver a seamless, end-to-end experience for bank customers looking to use stablecoins and CBDCs. As crypto continues to grow in popularity, banks should prepare for the much wider propagation of stablecoins and CBDCs in the next two to three years. These currencies, more stable and secure as they are, will soon overtake the more volatile classic cryptocurrencies including Bitcoin and altcoins. Hard to imagine today, perhaps, but it is also possible that CBDCs will soon begin to replace pure fiat currencies, particularly for digital payments.

It’s clear, therefore, that any bank without a coherent crypto strategy is likely to be quickly left behind and forced to play catch-up.

Next steps

Join the Banking Circle webinar on 23rd June to find out more.

A panel of experts from Banking Circle, Ripple, Mode, and Kraken will discuss where banks are in the crypto adoption cycle and what’s next for them. Topics will include:

  • What does the growth of crypto mean for traditional financial services and where they are in the crypto adoption cycle?

  • How can banks add value in the crypto universe and what barriers are holding them back?

  • What is the role of DeFi and what is the impact on banks?

  • What’s next for banks and crypto?

Register here to join the webinar.

About Mishal Ruparel

Regional General Manager, APAC, Mishal is part of the founding team at Banking Circle – an EQT-backed global financial infrastructure servicing financial institutions globally. As part of the senior leadership team, he has been responsible for leading the sales organisation globally before moving to Singapore where, as General Manager, APAC, he is responsible for expanding Banking Circle in the APAC region. With a career spanning 17+ years within banking and fintech, Mishal has held senior roles covering international business development, strategic partnerships and corporate finance globally for organisations such as FIS WorldPay, Barclays Bank, and Fiserv.

About Banking Circle

Banking Circle is a fully licensed next generation Payments Bank, designed to meet the global banking and payments needs of payments businesses,banks, and online marketplaces. Banking Circle solutions power the payments propositions of more than 200 regulated businesses, financial institutions, and marketplaces. Banking Circle is wholly focused on delivering a payments solution for payments businesses, banks, and online marketplaces that is invisible to end users but will enhance their customer proposition – without upfront investment in systems or process changes.

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Keywords: financial services, crypto, cryptocurrency, banks, research, digital currency, Bitcoin, payments , regulation, transactions
Categories: DeFi & Crypto & Web3
Companies: Banking Circle
Countries: World
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DeFi & Crypto & Web3

Banking Circle

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