Banks and digital assets: from naysayers to pivotal partners

Digital assets, Blockchain technology and the adoption of cryptocurrency are on the rise and  we’re moving towards them being a part of the mainstream financial system in the UK.  We’re seeing many fintech players including such technology into their offerings, and  specialists are emerging to pioneer the technology and its introduction into the mainstream  financial system. To successfully integrate digital assets into the financial system, these  existing and emerging providers require collaboration and support from banks, which are  the fundamental gatekeepers of key financial infrastructure. For example, although crypto is  essentially its own ecosystem, it requires the support of banking infrastructure to enable  consumers to access it easily via fiat on/off-ramps to enable the exchange from fiat  currencies to cryptocurrencies, and vice versa, thus bringing monetary value into the crypto  ecosystem.  

In this article, we’ll discuss:  

o The significance of digital assets and Blockchain technology and if it is truly here  to stay. 

o The impact on the rest of the financial landscape as digital assets come into  mainstream use.  

o The importance of collaboration between digital asset providers and banks, in  order for digital asset participation to truly come to fruition.  

o The challenges that banks face when integrating and adopting digital assets.  o Examples of how key providers who are leading the way in bringing digital assets  into the mainstream.  

Are digital assets and Blockchain technology here to stay? There are clear trends showing that digital assets and Blockchain technology have already  penetrated the mainstream financial system. On the consumer side we have already seen  evidence such as in Nigeria, where 32% of people say they use or own cryptocurrency and, as reported by Gemini (which is an active firm in the cryptocurrency sector) in the UK and  Europe, where there is a clear shift to a broader range of demographics of those investing in crypto. At an institutional level, Coinbase has carried out an IPO, investors such as Blackrock  now have exposure to crypto via various fund, and multinationals such as Tesla openly back Bitcoin. Many believe this is just the start of Blockchain technologies making their mark on  our mainstream financial system. A key part of the mainstreaming of digital assets and  Blockchain technology is existing players in the space that are looking to expand their reach  and make waves in the traditional financial system, expanding their remit beyond just digital  assets. For example, Silicon Valley giants and payment platforms such as PayPal and Square  offer users a payments ecosystem that combines fiat and crypto.  

However, as these platforms and their competitors extend their reach, they need to  differentiate themselves to appeal to the crypto-curious. That’s where the importance of  partnering with banks comes in. With the backing of a bank, these platforms can move  beyond agency banking and towards a true BaaS offering and provide end-users with a safe,  secure and FSCS protected platform. This gives the look and feel of a traditional banking  partner and thus elevates the provider to become an integral part of our mainstream  financial system. 

Source: Pixabay 

The challenges of adopting digital assets 

For banks and other traditional financial institutions, the biggest challenge when it comes to  digital assets is learning how to interact and work with these kinds of decentralised  technologies. ClearBank is leading the charge on this, by working with the most regulated,  secure and reputable firms in the crypto space, facilitating their emergence into the  mainstream through ClearBank’s technology, and supporting their growth by enabling them  to offer FSCS protected platforms. Banks looking to partner with digital assets providers are  more than aware of consumer hesitance to adopt the offering into their everyday lives. To many consumers, Blockchain technology is unfamiliar, while digital currencies are highly  volatile and lack regulation.

With scare stories of unscrupulous and unregulated players frequently in the news,  concerns over the environmental impact of digital currencies, and the headlines prompted  by the FCA’s recent direction over Binance, potential users are often extremely hesitant to  invest in or use digital currencies. As such, increasing reliability and regulation is key to  opening up cryptocurrencies to the mainstream. However, despite their ability to make a  difference, traditional banks are struggling to conclude on whether they should work with  crypto companies and digital asset providers, with their risk appetite constantly changing.  For those providers trying to work with them, this is proving frustrating.  

The key to a successful partnership between banks and digital assets is building out policies,  procedures and regulation which incentivises new customers to explore crypto and thus  supports growth. Dialogue between banks, traditional financial institutions, crypto firms and  regulators will develop best regulatory practice and reassure consumers. For example,  obtaining FCA accreditation as an Authorised Payment Institution or Electronic Money  Institution, in combination to 5MLD registration, reassures consumers, can enable firms to  optimise their banking solution, use technology to deliver real-time fiat on/off rails, and  ultimately enhance their end customer experience. Taking steps towards regulation will  help to address both consumer and business issues with adopting with Blockchain  technology and enable the security and familiarity that comes from FSCS protection which  banks can provide.  

Ultimately, for digital assets to be successfully immersed into the mainstream financial  landscape, support for digital asset providers from banks on how to interpret regulation and  remain complaint, as well as the collaborative development of best practice procedures, is  key.  

Leading by example 

Across payment platforms, the convergence of crypto and fiat is evident. More significantly,  the demand for offerings which allow end customers to easily convert crypto into fiat (and  vice versa) is clear, yet traditional banking partners aren’t working to provide a reliable and  effective solution for doing so. In an attempt to meet this demand, multiple existing crypto  exchanges are looking to diversify and become financial services providers or payment  platforms. Following this trend, we’re seeing a number of already well-established payment  platforms powered by crypto looking to expand their reach into traditional investments.  

The need for collaboration 

The rapidly-evolving financial system and the presence of unscrupulous players is  incentivising legitimate providers to take additional measures, such as improving internal  regulation and partnering with banks to offer FSCS-protected accounts. This level of  protection differentiates them from the unregulated partners and reassures customers,  supporting their stated mission of becoming the next generation of financial services  providers. By banks and digital asset providers successfully working together, they can show  regulators that such partnerships are possible and perhaps influence future regulatory  decisions in favour of such partnerships, to allow for the emergence of digital assets into the  mainstream. 

Ultimately, for digital assets to be truly successful, effective and part of our mainstream  financial system, there must be collaboration between providers and traditional banking  institutions. These institutions have the power to influence regulation and ensure  consumers feel empowered to begin utilising these alternative finance offerings, whilst  digital-first players have the power to solve inherent problems within our prevailing  monetary system.  

By Andrew Delves, Senior Relationship Manager: Fintech, at ClearBank

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