Commonly considered a relatively new concept, the idea of cryptocurrency was first conceived in the Netherlands as early as the 1980s. The 1990s saw some major advances in digital cash, but it wasn’t until 2009 that Bitcoin was launched. and quickly became the most widely used cryptocurrency. Progress on the new currency was slow, despite rapid technological advances that gave most households access to cryptocurrencies if they so desired.
Cryptocurrencies were designed to allow payments without banks. But this perceived benefit could be exactly what has kept cryptocurrencies from becoming mainstream for decades. The regulation and legacy that cryptocurrencies sought to divert, to make payments faster, cheaper, and more convenient, also provide customers with vital protection and stability that build trust.
However, recent research reveals that cryptocurrency usage is growing faster than ever, with total transaction volume reaching $15.8 trillion in 2021, up 567% from 2020. Around 300 million People now hold cryptocurrencies all over the world and 75% of users would like to use crypto to pay for goods and services.
While non-bank financial institutions (NBFIs), including crypto exchanges and specialized acquirers, have embraced the shift to crypto more quickly than banks, the acceptance network is widening and banks are getting deeper and deeper into crypto. in the world of crypto.
Many central banks, including those in the EU, Canada, Sweden, China, Brazil, the US, and the UK, are in fact developing their own digital currencies. These central bank digital currencies (CBDCs) promise many of the advantages of cryptocurrencies, but much less volatility, as they are digital versions of national currencies backed by government commitment. Similarly, asset-pegged ‘stablecoins’ like fiat currencies or more established cryptocurrencies are less volatile than classic cryptocurrencies like Bitcoin or altcoins, reducing risk.
However, there are still hurdles to overcome for cryptocurrencies to gain wider acceptance from major banks.
The ongoing volatility, as well as the high proportion of criminal crypto users, means that it is well beyond the risk appetite of most banks. And this is particularly the case when you consider how regulators began to see banks as a more important target after the 2008 financial crisis.
The crypto industry itself is working hard to increase fraud detection and improve anti-money laundering systems and has already significantly reduced crime in recent years. With improved security, the emergence of a consistent regulatory environment, and improved stability of CBDCs and stablecoins, we are entering a new phase in the evolution of cryptocurrencies. Now is the time for the banks to get on board, or they risk having to catch up later.
Due to their direct commitment to the clearing and settlement system, enduring consumer trust, and experience in shaping consumer protection regulation with governments, banks have a significant advantage over NBFIs in driving widespread use of digital currencies. As such, crypto acceptance, transaction, and settlement will no doubt grow faster when banks play a full role. But banks need to develop a robust approach to crypto that helps them stay ahead and create a competitive offering.
get on board
Stablecoins are already being accepted as legal tender by major payment networks like 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 mean that they are likely to play an increasingly important role.
To prepare for the widespread adoption of digital currencies, banks should work with third parties as part of their ongoing digitization strategy to develop payment service infrastructures that can seamlessly interface 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 handle technical and regulatory issues, helping to deliver a seamless end-to-end experience for banking clients looking to use stablecoins and CBDCs. As the popularity of cryptocurrencies continues to grow, banks should prepare for a much wider spread of stablecoins and CBDCs in the next two to three years. These coins, more stable and secure as they are, will soon outperform the more volatile classic cryptocurrencies, including Bitcoin and altcoins. It is perhaps hard to imagine today, but it is also possible that CBDCs will soon start to replace pure fiat currencies, particularly for digital payments.
It is clear, therefore, that any bank without a consistent crypto strategy is likely to quickly fall behind and be forced to catch up.
Join the Banking Circle webinar on June 23 to learn more.
A panel of experts from Banking Circle, Ripple, Mode and Kraken will look at 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 are they 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 cryptocurrencies?
Register here to join the webinar.
About Mishal Ruparel
Regional General Manager, APAC, Mishal is part of the founding team of Banking Circle, an EQT-backed global financial infrastructure serving financial institutions globally. As part of the senior leadership team, he has been responsible for leading the sales organization 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 over 17 years in banking and fintech, Mishal has held senior roles covering international business development, strategic partnerships and corporate finance globally for organizations including FIS WorldPay, Barclays Bank and Fiserv. .
About the Banking Circle
Banking Circle is a fully licensed, next-generation payment bank designed to meet the global banking and payment needs of payments businesses, banks and online marketplaces. Banking Circle’s solutions power the payment propositions of more than 200 businesses, financial institutions and regulated markets. Banking Circle is completely focused on providing a payment solution for payment companies, banks and online marketplaces that is invisible to end users but will enhance your customer proposition, without upfront investment in systems or process changes.