Crypto is still an outlier in the product line for many banks. But a few have made big commitments.
By Sayon Deb
Cryptocurrencies have gotten considerable attention from consumers and the financial industry over the past few years—and much of it for negative reasons. The collapse of the FTX exchange made Sam Bankman-Fried a household name. After dizzying heights, crypto values sharply corrected in 2022, with roughly $2 trillion in cryptocurrency value vanishing from the all-time high in November 2021. But despite extreme volatility in crypto valuations and the high-risk nature of virtual currencies, public interest in the sector appears to be strong.
As banks begin to explore potential approaches to the crypto space, bank marketers across the industry should start tracking what could be a promising growth opportunity for their institutions while weighing the risks involved. This article introduces a framework for thinking about the cryptocurrency (and broader digital assets) market and how small and big banks are getting involved in the space.
What are digital assets and cryptocurrencies?
Digital assets, of which cryptocurrencies are one type, generally fall into the following four broad categories: “traditional” cryptocurrencies or crypto coins such as bitcoin and ether, stablecoins, central bank digital currencies and non-fungible tokens.
Cryptocurrencies derive their value from the markets set up to facilitate their sale and transfer—as in each coin, at any given time, is worth as much as someone is willing to pay for it. Cryptocurrencies by their very nature are somewhat of a double-edged sword. Their (digital) scarcity and decentralized nature lends to their perceived ability as a store of value, but these attributes also contribute to its price volatility.
Stablecoins, designed in response to the significant price volatility in traditional crypto coins, are structured to minimize price volatility and are typically pegged 1-to-1 to a fiat currency like the U.S. dollar. They maintain their peg by holding sufficient deposits in reserves. For example, USD Coin is backed by cash held by leading U.S. financial institutions and U.S. Treasuries held at third party custodians.
Central bank digital currencies (CBDCs) and non-fungible tokens (NFTs) are beyond the scope of this article but it’s important for banks to track these trends for future inflection points in adoption. CBDCs are a concept being explored by central banks around the world in an effort to “digitize” traditional fiat currency and intended to carry full currency status. ABA contends that the dollar is already largely digital today, and that the theoretical benefits of a CBDC in the US are outweighed by the serious risks it could introduce. NFTs on the other hand are cryptographic assets on blockchain and offer a certificate of authenticity for a digital asset such as artwork, music or a video. Unlike cryptocurrencies, they are not “fungible” and cannot be traded or exchanged at equivalency and therefore cannot be used for transactions.
While each of these digital assets has varying use cases, they all ultimately rely on distributed ledgers or blockchain technologies. Blockchains are shared, immutable ledgers that facilitate the process of recording transactions and tracking assets in a network. They represent a transparent and distributed way of recording both financial and non-financial transactions. Their use for the creation, storage, transfer and trading of cryptocurrencies has grown exponentially over the past few years. Beyond cryptocurrencies, applications of blockchain technology in banking has the potential to substantially reduce operational costs and increase transactional efficiency in payments, trade finance and securities settlement.
In many ways, the crypto genie is out of the bottle. The cryptocurrency market is flooded with competing offerings, estimated to be more than 22,000 tokens and coins by CoinMarketMap, and a global market cap that hovers above $1 trillion with daily volume above $63 billion as of this month. The market is primarily dominated by bitcoin and ether, together making up nearly 60 percent of the crypto market. Beyond crypto coins, the next two biggest assets in the market are stablecoins Tether and USD Coin, together accounting for less than 15 percent of market share.
That said, traditional banks have been hesitant to adopt the use of cryptocurrencies given the broad set of concerns that still remain, including environmental impact, financial stability, consumer protection and AML/KYC, among others.
How are banks approaching the crypto ecosystem?
While many banks have been monitoring the cryptocurrency space and engaging with customers to assess their needs and the potential opportunity, few have launched cryptocurrency products and services, so far.
There are, however, a few notable examples of banks that have ventured into the space.
In 2021, the $800 million-asset Vast Bank launched its crypto banking services by unveiling a platform that allows customers to store and exchange digital assets at the institution. Spurred by an interpretive letter issued by the Office of the Comptroller of the Currency in 2020, which essentially gave nationally chartered banks the ability to provide cryptocurrency custody services, Vast Bank entered into the cryptocurrency space by providing custody services directly to consumers. (The OCC has since issued an interpretive letter that requires nationally chartered banks to notify the OCC and obtain written non-objection prior to engaging in any cryptocurrency activity, and the banking regulators have highlighted several key risks posed by cryptoassets that banks should consider if they wish to offer crypto-related services, noting “significant volatility and the exposure of vulnerabilities in the cryptoasset sector.”)
As investment and institutional customers increasingly demand access to and exposure in the digital assets market, several larger banks are exploring offerings. A growing number of major institutions, including Morgan Stanley, Goldman Sachs and JPMorgan, have begun investing in custody solutions and custody technology providers as well as associated blockchain infrastructure. BNY Mellon recently added cryptocurrencies to the assets that it holds as a custody manager and will allow customers to use one custody platform for both its traditional and crypto holdings. JPMorgan has one of the largest crypto teams, with several hundred employees working in its Onyx division, which provides blockchain-based solutions addressing information exchange, money movement and asset digitization. Another indicator of surging interest among banks can be seen in crypto hiring. Financial institutions added three times as many crypto jobs in 2021 than in 2015, according to data from LinkedIn.
Banks see opportunity and risk
It’s easy to get caught up in the cryptocurrency frenzy. “Fear of missing out” is a likely driver of much of the retail investment in cryptocurrency. However, it’s important to moderate expectations given the outstanding questions around cryptocurrency as well as the lack of regulatory clarity. For now, those issues are keeping most banks at bay. Data from the Federal Reserve and Conference of State Bank Supervisors 2022 National Survey of Community Banks found that just 1 percent of banks currently offer cryptocurrency services, while only one in 10 banks that don’t offer crypto plan on doing so in the next 12 months.
While most banks take a wait-and-see approach, it is important to continue learning about the technology and cryptocurrency ecosystem, generally. The cryptocurrency market is likely to continue to evolve and may be used in the future to facilitate many kinds of financial activities.
Sayon Deb is senior director for innovation strategy at the American Bankers Association. This topic was inspired by a session at the 2022 ABA Bank Marketing Conference. Stay tuned for registration updates to the 2023 ABA Bank Marketing Conference set for Sept. 27-29 in Austin, Texas.
