Banks, cash in on crypto

The future of finance is digital. Challenger banks have taken the market by storm: Starling and Monzo now boast over 7 million accounts combined, and US-based Current recently closed an A16z-led $220m Series D. Non-fungible tokens (NFTs) are now a staple of public conversation following the eye-watering $69 million sale of Beeple’s digital masterpiece. The cryptocurrency market has reached a $2 trillion high. Combined, these events have paved a one-way road for the future of finance.

Some US banks have started engaging with technology to enable mainstream financial use of digital assets; Goldman Sachs is looking to facilitate digital asset investment from Q4 this year. Despite this, many retail banks are still hesitant to embrace their digital futures: HSBC and NatWest recently announced their reluctance to support customers or clients who buy, sell, or accept payments in cryptocurrency. The industry has a very long way to go to become a competitive player in the fast-evolving digital asset marketplace.

To secure their future relevance and drive revenue, banks must enter the digital custody space.

Banks must grasp the digital asset opportunity

Mainstream banks and financial institutions should be at the forefront of defining how digital asset custody, collateral, securitization, and liquidity can work (see definitions below). With so much more ground to cover in their journey to digital, incumbents need to stop watching from the side-lines and start figuring out how they can put digital assets to work.

The key areas of digital asset opportunity fall into four core themes:

• Custody: The holding or safekeeping of digital assets on behalf of a customer or investor
• Collateral: The pledge of a digital asset by a borrower to a lender to secure the repayment of a loan
• Securitization: A tradable financial digital asset which has a market value
• Liquidity: Turning digital assets, such as Crypto, into cash

Custody

Banks are well-placed to diversify their offerings and safeguard digital assets. They can leverage their market expertise to help minimize risk of loss or theft. Their involvement alone will alleviate concerns about the perceived high risk involved in digital asset management. Heavyweight banks also have access to an established and loyal customer base ready and willing to be supported in their move to digital; not to mention years of experience operating in a highly regulated market.

Digital custodian disruptors such as Coinbase and Casa (a Bitcoin self-storage startup) boasted a +300% increase in clients and a tripling of revenues in 2020. Partnerships between mainstream banks and these disruptors would mitigate concerns around incumbent, clunky technology systems. It would also guard against the loss of crypto keys, which once lost or stolen cannot be restored.

To secure their future relevance and drive revenue, banks must enter the digital custody space.

Collateral

NFTs, as a key enabler of digital custodianship, are a valuable opportunity. NFTs will transform the world of lending. Due to their non-fungible nature, each NFT token is unique and can therefore be linked to one particular physical or digital asset. Today, mainstream banks and lenders refuse to provide a loan secured by uncommon or digital assets. This could be a rare Pokémon card, or the rights to a LeBron James highlight reel. Why do they they refuse? Banks’ inability to accurately value and reappraise the item. NFTs make this dream a reality. NFTs represent ownership of the digital or physical asset; this allows banks to quickly understand the value of an asset and therefore accept it as collateral against a loan.

If the highly coveted CryptoKitties can attract a $1m valuation, and footage of a LeBron dunk can sell for almost $400,000, imagine the value art, sports content, and digital music NFTs could bring.

Mainstream banks need to act now to play a formative role in the NFT market. It’s already seeing activity from new entrants such as NFTfi which has loaned almost $3 million using NFTs as collateral. If the highly coveted CryptoKitties can attract a $1m valuation, and footage of a LeBron dunk can sell for almost $400,000, imagine the value digital art, sports content, and digital music NFTs could bring.

NFTs will enable cryptocurrency holders to turn their assets into usable collateral without needing to sell, and banks need to capitalize on this opportunity. NFT/crypto-backed lending is just the beginning.

Securitization

Beyond the custody of NFTs, mainstream banks can help create new forms of securities through the bundling of NFTs, cryptocurrencies and other digital assets. Banks are better placed than new market entrants to package a set of digital assets in any given industry, work with regulators to establish a framework, and successfully issue them into the marketplace. Banks must pivot to become established marketplaces for digital asset securities. For inspiration, they should look to consortiums like DirectBooks, who are a singular distribution point to manage communications across underwriters and investors for crypto/NFTs.

Furthermore, distributed ledger (ie: blockchain) technology supports smart contracts which provide a permanent audit trail via the immutable blockchain ledger. They also drive fast contract completion and prevent disputes. Looking forward, investors will be able to engage with an asset class (a group of the same or similar financial instruments) which has never previously existed such as digital art, early-stage private businesses and property. 

Liquidity

To be brought to the masses, digital assets need to be liquid. As established players in the savings, debit/checking, loan and cash withdrawal space, mainstream banks can make this happen. This gives banks a significant disruptive advantage in providing customers with the ability to transform their digital assets, such as cryptocurrency, into tangible cash. Banks on an ATM network should leverage their existing infrastructure to provide instantaneous cash withdrawals based on live cryptocurrency market rates; this will empower their 40 million customers to unlock the value of digital assets.

Banks will see most value by becoming enablers of the end-to-end cycling of cash-to-cryptocurrency and cryptocurrency-to-cash; not by fighting it.

Established peer-to-peer payments provider, MoneyGram, is leading the charge. They recently partnered with Coinme, one of the largest Bitcoin-to-cash exchanges in the world. This partnership will leverage MoneyGram’s payments platform and Coinme’s crypto exchange to allow customers to bilaterally exchange Bitcoin and cash across thousands of locations in the US.

Ultimately, banks will see most value by becoming enablers of the end-to-end cycling of cash-to-cryptocurrency and cryptocurrency-to-cash; not by fighting it.

Define the market

Mentions of ‘cryptocurrency’ in financial services documents have increased 96% in the last 6 months; mainstream banks should think twice before letting new market entrants monopolise the exponential opportunities in digital custodianship, collateral, and securitization.

By embracing digital assets, banks can lower the risks associated with digital asset management. They can also create a market that is large enough for certain digital asset classes to be truly viable. Mainstream banks’ involvement alone can guarantee the long-term relevance of blockchain-based digital assets. The potential for innovation and growth is astounding. Banks must cash in on this opportunity now.