Six Takeaways For Banks Before Entering The Crypto Market – FinTech

[ad_1]

Despite the volatility around the cryptocurrency, incumbent banks are intrigued by its potential. Here are six ideas for seizing the moment.

Cryptocurrency is a major long-term disruptor. Banks, financial services companies and regulators all know this. Even after wild swings that saw two of the biggest digital currencies, Bitcoin and Ethereum, fall more than 50%1 from their all-time highs in 2021, the market has maintained lofty valuations. As of November 2022, the total value locked in decentralized finance (DeFi) protocols,2 one of the most tracked metrics in the crypto industry, was around US$56 billion, a growth rate annual compound of 141% over the past two years.

All sorts of financial products and services have sprung up on the market, including crypto-backed mortgages,3 personal loans,4 and revolving credit.5 But given speculation, risk and little regulation, there is no Doesn’t make sense that every financial institution offers cryptocurrency. service at this time. The cost alone of building infrastructure to properly maintain assets makes the process a no-start. Other technological and regulatory hurdles are also daunting.

Still, the momentum is reaching a point where some products are likely to move faster than others, with multiple participants hitting the market in a short period of time. The question for incumbents is whether they will seize the moment or be forced to catch up with the competition. (See sidebar “Incumbents at a 3.0 Crossroads.”)

Incumbents at a Crossroads 3.0Incumbent financial services are now investing heavily and innovating in digital assets. However, there is reluctance to implement these assets due to the current lack of regulatory guidelines. Incumbents rightly expect to be subject to regulatory scrutiny when rolling out digital asset offerings, and until regulations are clearer they will likely remain cautious and implement more slowly and methodically than crypto natives.

Below are six ideas that financial institutions should consider now to be ready when the time comes.

Map traffic signs: Financial institutions will want to begin mapping and re-mapping traffic signs that mark the progress of emerging technologies that correspond to Web 3.0. This means staying current with technology and looking ahead to find new use cases that align with business goals. It’s important to remember that crypto assets will touch nearly every aspect of business, from recruiting talent to bolstering the organization’s cybersecurity, so be aware of advancements in areas that can not seem so obvious.

Build the infrastructure: As organizations begin to reassess their position and adjust their signage, they need to think about how they will build a future-proof operational infrastructure. This will include developing deposit and withdrawal systems, building a team that can navigate the complexity of compliance requirements, and working with tech enthusiasts who can predict the changing digital banking landscape. While there is no one-size-fits-all approach, financial institutions should aim to be as flexible as possible so they can continually adapt as new Web 3.0 features are discovered.

Become a crypto custodian: When a financial institution feels ready to dip its toes into the crypto world, it must be able to custody crypto assets. Simply put, banks will need to secure the private key, a variable used with an algorithm to encrypt and decrypt data to prove that they own the crypto assets. Regulators like the Office of the Comptroller of the Currency have already issued guidelines (in the form of a letter) on being a custodian of crypto assets, so financial institutions will want to make sure they operate in accordance with these guidelines.6

Partner with a digital asset custody platform: Developing digital asset custody capabilities doesn’t have to come from in-house. Consider how French bank BNP Paribas partnered with Metaco, a Swiss digital asset custody company, to create the necessary infrastructure7 to integrate custody offerings. Likewise, financial institutions need to look within and identify opportunities where they can partner to capture and create value. By doing so, banks will find ways to fully embrace crypto technology in the long term. (See “View the larger image” sidebar.)

See the big picture From a short-term perspective, cryptocurrencies are just speculative assets within the financial industry. But the long-term perspective recognizes cryptocurrency as an integral part of Web 3.0.

Unite a partner ecosystem: After becoming a qualified crypto custodian, financial institutions need to develop their partner ecosystem. In some cases, this may mean bringing existing partners into the fold to diversify the bank’s crypto offerings, such as using crypto to purchase goods from a retailer. In other cases, banks may want to be the sole issuer, while another partner provides the operational context. Many of the possibilities of Web 3.0 have yet to be realized, so look for opportunities to work with pioneering digital natives.

Lead by example: If a bank has taken all of these steps and placed itself at the center of a thriving ecosystem, then it will have the opportunity to lead the industry into the next generation. By viewing the future through the lens of young, tech-savvy entrepreneurs, established players can combine long-standing expertise with relentless innovation. Gaining minority stakes and joining corporate boards in key crypto ecosystems are just a few ways leaders can position themselves at the forefront of tomorrow’s financial landscape.

Following recent high-profile events in the crypto market, regulatory scrutiny is likely to intensify. Digital asset teams at banks can anticipate potential new regulations if they:

Develop and evaluate fraud risk management, anti-money laundering and sanctions compliance programs (including accounting for key elements such as compliance structure, policies and procedures, risk assessments , transaction monitoring, Know Your Customer due diligence, control effectiveness, training and governance) Ensure the compliance program addresses risk factors relevant to the bank Create a plan for efforts remediation plans needed to bring a current program into compliance with regulatory requirements and develop or enhance any existing program remediation plan Independently validate the compliance program or remediation plan to ensure that governance, controls, and management structures are in place and working effectively Design a target operating model which includes an independent assessment of the current state of the compliance program Establish an active team of internal subject matter experts to support regulatory response efforts

As recent developments clearly show, the financial sector is changing at a rapid pace. For those looking to stay ahead of the crypto craze and make the most of this latest disruption, a proactive approach is essential.

Footnotes

1. Alex Gailey and Ryan Haar, “The Future of Cryptocurrency: 8 Experts Share Their H2 2022 Predictions,” NextAdvisor (October 31, 2022), https://time.com/nextadvisor/investing/cryptocurrency /crypto-currency-future/.

2. “DefiLlama DeFi Dashboard,” DefiLlama (last visited December 8, 2022), https://defillama.com/.

3. Krisztian Sanor, “Crypto Mortgages: How to Buy a Home Using a Crypto-Backed Loan,” CoinDesk (May 23, 2022), https://www.coindesk.com/learn/crypto-mortgages-how -you -can-buy-a-house-using-a-crypto-backed-loan/.

4. Zina Kumok, “Crypto Loan: Use Coins As Collateral For Your Loan”, Forbes (September 9, 2022), https://www.forbes.com/advisor/personal-loans/crypto-loans/.

5. Ronita Choudhuri-Wade, “How Do Crypto Lending Work?” NerdWallet (June 29, 2022), https://www.nerdwallet.com/article/loans/personal-loans/what-is-a-crypto-loan.

6. Office of the Comptroller of the Currency, “Federally Chartered Banks and Thrifts May Provide Custody Services for Crypto Assets,” (July 22, 2020), https://www.occ.gov/news-issuances/ news-releases/2020/nr-occ-2020-98.html.

7. Shawn Amick, “Largest Eurozone Bank to Launch Bitcoin, Crypto Custody Platform,” Bitcoin Magazine (July 19, 2022), https://bitcoinmagazine.com/business/bnp-paribas-to-partner- with- metaco-for-the-custody-of-digital-assets.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

[ad_2]