The cryptocurrency industry is the Wild West compared to traditional finance, but a number of banks are taking an interest in digital assets and decentralized finance (DeFi). This year in particular has been notable for banks exploring digital assets.
More recently, JPMorgan demonstrated how DeFi can be used to improve cross-border transactions. This came shortly after BNY Mellon – America’s oldest bank – announced the launch of its digital asset custody platform, which allows certain institutional clients to hold and transfer Bitcoin (BTC) and Ether (ETH).
The Clearing House, a banking association and payments company in the United States, said Nov. 3 that banks “should be no less able to engage in digital asset-related activities than non-banks.”
Banks aware of the potential
As banks continue to show interest in digital assets, BNY Mellon’s 2022 Global Institutional Client Survey highlights growing demand from institutions seeking access to digital assets through reputable custodians. According to the survey, almost all of the 271 institutional investors (91%) are interested in investing in tokenized assets. The survey also found that most of these investors use more than one custodian, with 35% dealing with traditional incumbents.
The increased demand from institutions looking to access digital assets is one of the reasons banks are interested in cryptocurrency and DeFi offerings.
Bobby Zagotta, CEO of Bitstamp USA – a cryptocurrency exchange founded in 2011 – told Cointelegraph that Bitstamp has recently received many incoming requests for its Bitstamp-as-a-Service offering, which allows fintechs and financial institutions traditional ways of giving customers access to cryptocurrency.
“Last year, fintechs were asking Bitstamp for services to support cryptocurrency. This year, fintechs discussed the downsides of not offering customers access to digital assets. Banks are realizing the fact that there is customer demand to buy and sell crypto, and if people can’t do that with their banks, they’ll go elsewhere,” he said.
Zagotta added that banks that are not currently looking to implement digital asset offerings will lose market share: “Banks are realizing that they could create a customer retention problem if they don’t come in the market with crypto offerings.”
For Zagotta, the BNY Mellon survey found that 65% of institutions currently engage with native digital platforms rather than traditional financial players. However, BNY Mellon’s findings also indicate that 63% of investigators would accept longer settlement times when transacting with a highly rated traditional institution.
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Additionally, some industry experts believe that big banks can advance their operations by implementing crypto and DeFi solutions. Colin Butler, global head of institutional capital at Ethereum Layer-2 network Polygon, told Cointelegraph that while the pilot transaction led by JPMorgan and the Monetary Authority of Singapore was an important step towards adopting decentralized solutions, it demonstrates also that these entities are testing to see if DeFi frameworks are beneficial.
“If the answer is ‘yes’, it would allow them to significantly increase the efficiency of their operations,” he said.
Butler explained that Polygon’s proof-of-stake blockchain ensures that the cross-border transaction conducted between JPMorgan, the Monetary Authority of Singapore and other banking entities is fast, secure and as cost effective as possible. He said:
“All of these are extremely important when it comes to DeFi adoption. The inherent efficiency of blockchain-based solutions is what gives DeFi an edge over traditional financial systems that have been built over the past few decades. As long as they “work”, these frameworks are very rigid.The latest advancements in DeFi can help make the whole transaction process much more efficient and convenient.
Echoing Butler, Seamus Donoghue, chief growth officer at METACO – a digital asset custodial provider for large financial institutions – told Cointelegraph that he believes all financial assets will eventually be represented on distributed ledgers. As such, Donoghue mentioned that it is imperative to rethink the infrastructure of the financial market.
“This is why virtually all Tier 1 banks are now investing in building new infrastructure: not for the current crypto bear market, but for a much broader view of how each asset will be represented. and how value will be created and traded, globally,” he said.
Donoghue added that banks will eventually become the bridge for institutions seeking exposure to digital assets and DeFi. He explained that this is because traditional financial institutions have consumer confidence, large balance sheets and a network of market players creating liquidity, as well as a customer base with unmet needs.
However, traditional financial institutions remain concerned about regulation. Mathias Schütz, head of client and technology solutions at SEBA Bank – a Swiss-based digital asset bank – told Cointelegraph that traditional banks are reluctant to engage with digital assets due to regulatory uncertainty.
In order to address this issue, Schütz noted that SEBA Bank, which is licensed by Swiss regulators, acts as a trusted counterparty for institutions to engage with digital assets.
“That’s why SEBA Bank was able to partner with a number of big banks in 2022, including LGT Bank, the world’s largest family-owned private bank,” he said. This is also important from a consumer perspective, as BNY Mellon’s survey results indicate that investors are primarily concerned about the legal and regulatory frameworks of digital depositories.
Will market chaos impact interest in digital assets and DeFi?
Regulation aside, the recent turn of events with FTX US and Binance could impact how traditional financial institutions view digital assets. Although it is too early to understand the consequences of this debacle, Donoghue mentioned that the reshuffling of FTX US and Binance could have a short-term impact. “It could change banks’ strategies to ignore cryptocurrency services and focus exclusively on digital securities more broadly, at least temporarily,” he said.
Eric Berman, a regulatory expert at Thomson Reuters, told Cointelegraph that he does not believe this event will accelerate banks’ involvement in digital assets. “Banking institutions have taken a long time with crypto as it is. The situation of FTX US and Binance probably shows the banking industry that it has done the right thing by taking a pragmatic approach.
Either way, Donoghue and Berman are aware that this event demonstrates the need for greater regulatory clarity before traditional financial institutions can innovate with digital assets.
“Recent negative industry events have underscored the critical need for safe and compliant infrastructure, business practices and regulatory oversight. So if anything, the demand for asset servicing from trusted institutions such as regulated global banks has only increased,” Donoghue said.
It’s also worth noting that the BNY Mellon survey looked at the impact of the collapse of the Terra ecosystem on institutional investors. According to the report, 9% of institutional asset managers noted that Terra’s collapse had no impact on their digital asset plans, while 50% said they took a short break to reevaluate, noting that they would probably continue soon.
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As to whether the bear market will impact banks’ interest in digital assets, Butler explained that the crypto market isn’t much of a factor affecting banks, especially when it comes to DeFi. For example, he pointed out that JPMorgan used Polygon to conduct a live cross-currency transaction that involved Singapore dollar and Japanese yen deposits, as well as a simulated tokenized government bond. According to Butler, these assets have no correlation to crypto prices. He added:
“Essentially, financial institutions are looking for ways to tokenize traditional assets – and that can be anything from bonds and fiat currencies to real estate deeds – and process them digitally. As such, these tokens retain the value of their “original” assets, so it’s more about the technology itself than crypto prices and bear/bull markets.
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