At first glance, one might think of crypto as an opposite and antithetical force to traditional banking. But if we step through the looking glass, we can see ways that crypto and banking can mirror and complement each other.
Crypto rose as a significant force through a global pandemic, an inflation crisis, and an age of rapid technological growth. Its visionaries - the “cypherpunks” saw it as the solution to what was wrong with the current financial system.
TradFi (Traditional Finance) has stagnated over recent decades with flatlining interest rates and bureaucracy bordering on Vogon levels. The cypherpunks envisioned a new peer-to-peer economy freed from the shackles of heavy-handed regulation and pointless red tape.
While the banking industry is limited by rates and regulations set by governmental bodies, the crypto landscape has been unfettered by such constraints. This freedom, combined with innovative protocols and blockchain technology, has spurred the fintech industry to develop new and exciting investment methods. In time this grew into what we now know as DeFi (Decentralized Finance). DeFi covers a wide range of financial services provided without an intermediary such as a bank.
Crypto isn’t all bad news for banks, however! Many banks are seeking to integrate some of cryptocurrency's best features with what is tried and tested in banking. The rise of crypto has ignited a fire in the minds of fintech leaders and creators. Crypto has the potential to stir things up and enhance the services currently offered.
Leading banks like JPMorgan Chase, Wells Fargo, and Goldman Sachs are dipping their toes in the crypto pool. What’s coming could herald a new era of individual-focused finance in crypto and banking. We’re going to look at some of the exciting endeavors already underway and where the financial sector might be heading.
Banks and the blockchain
These days it seems every big bank has hired a blockchain expert. Whether they're looking at the technology or providing new investment options, banks realize that crypto is here to stay. Banks are examining how they can use blockchain and Distributed Ledger Technology (DLT) to improve existing services.
Banks are using Distributed Ledger Technology (DLT) for cross-border payments and settlements. DLT has also seen applications in record-keeping and the tokenization of assets. Having long sought a way to maintain a digital identity record of individuals across platforms, blockchain technology may provide a perfect solution to the banking sector.
While many banks are skeptical, they understand that crypto is too big to ignore. Some are experimenting with the technology; others are adding crypto to their investment portfolios. As individuals are looking to buy into the crypto boom, banks now offer crypto products and custodial options as part of their wealth management services. Here’s just a sample of what banks are currently working on.
J.P. Morgan was one of the earliest adopters and supporters of DLT and crypto in the banking sector. In 2019, it became the first global bank to launch a blockchain network. The JPM Coin network was designed to improve transaction times, allowing immediate payments. This in-house coin is part of their exploration of “programmable money,” according to their blockchain specialist, Umar Farooq. Taking it even one step further, J.P. Morgan set up a specific digital asset unit called Onyx. This separate unit was created to “disrupt the bank from within.” Umar Farooq is head of the Onyx unit and doesn’t consider crypto a threat to TradFi. Instead, he thinks banks that embrace the technology will be able to provide a better service for their clients. J.P. Morgan has truly embraced cryptocurrency and sees itself as a leader in the adoption of DLT by banks.
UBS, alongside banks like Lloyds and Santander, pioneered the Utility Settlement Coin (USC) project. USC started as a research project into how DLT and tokenization of assets could work within the TradFi sector. The USC project enables near-instant settlement of cross-border payments between banks.
The USC project expanded into Fnality International, an international group of banks and financial organizations building interbank blockchains and developing ways to tokenize assets and quickly transfer value between banks.
BNY Mellon made crypto headlines when it invested in Fireblocks as part of a $133 million funding round. Fireblocks is a leading crypto custodian and part of BNY Mellon's expansion into digital custodial services.
Fireblocks connects banks to DeFi with custodial services and APIs (Application Programming Interfaces) that create a single point where financial institutions can interact with the entire crypto ecosystem. Having crypto APIs as part of their services allows BNY Mellon to easily participate in the growing crypto sector in a way familiar to traditional banks.
As part of its wealth management services, Morgan Stanley now offers crypto fund options for some of its wealthier clients. These include funds with NYDIG, a Bitcoin fintech company. These funds give investors exposure to the cryptocurrency market as a part of a diverse portfolio.
NYDIG creates crypto products and services that mirror those found in TradFi. These include savings accounts, rewards programs, payroll services, asset management, and financing options. This familiarity is ideal for banks and financial institutions who want to offer crypto products but are unsure where to start.
In 2018, Citibank bought a share of the enterprise blockchain firm SETL. SETL is developing a Regulated Liability Network (RLN). RLN is a way for banks worldwide to deal with transactions and payments within a single network underpinned by a Global Banking Blockchain.
One of the main roadblocks to global adoption by banks is scalability. SETL claims its blockchain can handle up to a million transactions per second (TPS). By showcasing how they can scale blockchain technology to handle the high transaction volume of TradFi, SETL is proving that DLT is a viable and valuable option for banks.
Integration is key to survival
Banks are exploring the crypto landscape and finding out what works for them. Integrating cryptocurrencies and DLT into their services means they can continue to attract wealthy clients and stay relevant.
The average individual doesn’t want to manage their finances across several platforms. Banks or DeFi platforms that can offer a one-stop shop for crypto and fiat assets will see success in the coming years. There are already wealth management apps and tools that help investors manage their crypto and fiat portfolios together, springing up due to demand.
API integration can make this possible for any platform. APIs let companies gather data and services from both TradFi and DeFi sectors to provide a seamless experience to the user. They bridge the gap between TradFi and Defi.
Financial institutions that use APIs can offer an unparalleled service to customers. API providers like Blockmate make crypto integration easy and intuitive. With Blockmate, financial institutions and banks can benefit from high-quality blockchain data aggregation and categorization using a single API.
It's not only banks who stand to gain in this pairing. Crypto can learn from the history of finance and use the wisdom of fintech experts to adapt to the future. Banks have years of experience and technology that can be useful to crypto projects, especially if mass adoption is ever to happen.
What crypto can gain
Crypto has the opportunity to avoid the pitfalls of the banking industry. Decades of banking have weeded out what doesn’t work in the sector. Crypto can learn from banks’ mistakes and use methods that stood the test of time.
The banking sector has a wide range of tools and services at its disposal that can be used within the crypto space. These include KYC (Know Your Customer) compliance, open-banking APIs, risk scoring, and more.
Many innovators in the crypto space, including Blockmate, are creating new ways to provide these services within DeFi. These tools can bridge the gap between TradFi and DeFi with the same high standard banks have come to expect. Cross-platform integration with banks and crypto providers provides a seamless service to the consumer.
One major hurdle facing the crypto space currently is regulation. There’s no doubt that regulation is coming fast. And no one knows regulation better than banks. As the DeFi and crypto markets grow, banks might be the perfect partner to weather the oncoming storm alongside.
If we look at the history of the financial sector, we can see parallels to today's crypto space. Before regulation, finance was a wild west of free banking, seesawing interest rates, and market volatility. The current crypto landscape mirrors the last days of the old unregulated financial industry.
We’ve seen a period of enormous growth and innovation where money has poured in, and people have been made rich. And we’ve seen the flipside of rug pulls and collapsed protocols. Some people have made their fortunes while others have lost their life’s savings.
So, if crypto is following in the footsteps of traditional finance, it's clear what comes next - regulation!
DeFi and regulation
As the crypto market explodes, it’s brought heavy scrutiny from governmental bodies across the globe. With the SEC and central banks breathing down the necks of crypto entrepreneurs, the industry will inevitably have to adapt to the new world order.
Many Decentralized Finance (DeFi) providers are working on integrating their solutions with the existing system. This includes private insurance for deposits held in savings accounts and working with certified custodians. Fintech experts are helping crypto projects using wisdom from the traditional banking sector.
While these steps carry the risk of losing some of the decentralization, they allow DeFi to adapt to cryptocurrency's increasing government scrutiny and provide a reliable service. Many DeFi and crypto platforms may work alongside banks to help grow a new peer-to-peer economy within a legal framework.
The future of finance
As regulations tighten, the DeFi and Fintech providers that survive and thrive will be those that can be flexible and predict the fast-changing trends of the crypto landscape. Banks adopting and integrating crypto into their current services will see the risk pay off in the coming years.
Developers are working hard at creating tools to connect these two worlds in a way that preserves the strong ethos of decentralization at the heart of cryptocurrency. At the core of DeFi is the idea that we should not be constricted by heavy-handed regulation and limited financial options. By combining crypto and banks, we may find a way to create a new individual-focused financial ecosystem that can endure the test of time.
The lines between traditional finance, CeFi (Centralized Finance), and DeFi are blurring to the benefit of all involved. The consumer has a broader range of financial options, banks are benefiting from the innovation of crypto trailblazers, and crypto has the gift of hindsight and the experience of TradFi companies to draw from.
The future isn’t DeFi or TradFi - it’s both!