Should banks embrace cryptocurrencies?

A new world of cryptocurrencies, stablecoins and central bank digital currencies (CBDCs) is emerging. Due to the advantages of taking part in such initiatives, many are now in advanced stages and various have been progressed to production projects, so banks cannot afford to remain on the side-lines any more. But, is the time right for financial institutions to really adopt cryptocurrencies and how can they offer this type of service securely? For banks, this is a big challenge they have to answer, if they do not want to be left out of this unstoppable wave in this new financial era.

Cryptocurrencies started out conceptually as an alternative to cash. The main idea was to create a type of digital, secure and decentralised currency. Adoption has been growing, and then came the pandemic, making digital payments even more widespread. This has been another big boost for digital currencies.

Today we are witnessing an explosion of cryptocurrencies as speculative assets or as a store of value (like gold), but their real application could go way beyond this. Potentially, with the  incorporation of smart contracts, they could underpin all digital multiparty transactions to improve efficiencies and security. The possibilities of CBDCs are much greater and will have a knock on effect on all sectors that accept digital cash payments. One of the main advantages of digital assets is (the potential for) disintermediation, elimination of friction and inefficiencies and, therefore, improving the speed and efficiency of operations and reducing costs.

The role of banks in boosting regulation

As in many other areas of innovation, large financial institutions are not going to be left out of this change and will have to progressively integrate digital assets into their services. Moreover, the role of banks is fundamental in helping official bodies on the necessary path towards the regulation and distribution of these at scale. 

The announcement that Diem, a cryptocurrency backed by Facebook, will be launched as a stablecoin at the end of this year; the different projects of some central banks to create their own digital currencies in China, Japan or Europe; the IPO of the cryptocurrency firm Coinbase; bitcoin fever; the recent announcement by Visa and Paypal that they will accept the use of digital currencies in the US despite the lack of a clear legal framework; and, above all, the progress of MiCA (the Commission's regulation of digital assets that will affect the whole of the EU) show that there is a wide plethora of different mainstream digital asset projects in this area and that banks need to take action now.

Some banks have already taken their first steps. BBVA, for example, offers its customers the purchase, sale and custody of bitcoins, although for the time being only through its subsidiary in Switzerland. The bank has already communicated its interest in extending these services to other countries as soon as this matter is regulated. For its part, Solaris Bank has created its own digital assets custody service, which it offers to its customers in Germany and other institutions -not to mention the launch of Sygnum Bank a couple of years ago in Switzerland, a bank solely focused on digital assets.

Undoubtedly, the integration of cryptocurrencies or other types of digital assets is of interest to a bank primarily to avoid the loss of its own clients and even to attract new ones. But this is not the only issue area of interest. In addition, new sources of income can be generated or even new business models based on crypto and decentralised finance (DeFi). 

Being aware of its enormous potential, you could integrate Diem (formerly known as Libra) into your own digital innovation lab in order to understand the implementation in detail, analyse use cases and reproduce them in realistic interaction scenarios. I am confident that this path of experimentation is the one that traditional entities should follow. In fact, we have observed that customers who experiment early get the most out of their products when they are launched in the market.

In short, beyond the use of cryptocurrencies as a mere investment asset, at our company we are convinced of the wide ranging impact of digital currencies, especially with the latest advances in security, scalability and smart contracts. The scope for growth is enormous in areas such as payments, transfers and decentralised finance. Undoubtedly, the new financial era, underpinned by CBDCs, will transform the future of the global economy, and regulators are already adapting the necessary legal structure to pave the way for wider adoption of CBDCs and other types of digital assets.

Banks must get to work to safely incorporate these types of services and start their digital asset journey as soon as possible!