The acceptance of cryptocurrencies in mainstream financial technology has sped up dramatically in 2020. PayPal and Square opted for some moves that generated lots of buzz. AllianceBernstein, a widely-known independent research company, released a study saying that it shifted its position on Bitcoins in asset distribution. According to other pros in the field, BTC may overtake gold.
The cryptocurrency industry is known to make statements on upcoming statements. In 2016, such quotes were “distributed ledger” proofs of ideas that weren’t meant to become a reality. This year, these may involve financial institutions admitting that cryptocurrencies are useful by allowing them and acting as they are avant-garde.
Yet, even with cryptocurrency fans reacting to portions of such statements, official institutions embracing crypto is not a small feat. At least, it is now clear that most big investment banks are currently covering BTC for their customers. Many corporate and retail financial institutions are rapidly looking for ways to use this commercial chance given by the grade of retail and institutional interest in cryptos.
What will happen with capital?
The biggest problem regulators and financial institutions face isn’t if BTC will be $50,000 or $500,000 nor if the USD will collapse in the upcoming week. The real question is in what shape will we see payments and investments in upcoming times. How will users see the capital, and how will someone oversee a system like that one?
The state of capital will not be designed with credit cards, SWIFTs, and interchange charges but with programmable tokens, networked services, and smart wallets.
For instance, if your daughter wants the new Xbox, your wallet will automatically go for Fortnite V-Bucks. In another situation, let’s say that your wallet will opt for Tesco tokens in a grocery store setting. And the list goes on.
This coming together of cryptocurrencies and traditional financial systems for a new future of cash is something we should follow. That’s the takeaway from my examples.
To achieve the goal, financial institutions have a lot to do in the meantime. Decentralized financing, along with cryptos, offers them the chance to do so. Banks that are jumping on the bandwagon will not fail to see the number of great opportunities and prosper. There is no point in resisting this change anymore, and it’s time to acknowledge that cryptos are here.
Now, we’ll dig deeper on how the sphere of capital is shifting and what banks will need to do.
Cryptos have use in the real world now
Those who criticize cryptos often say that digital currencies have no value. There are 4 uses we can describe here now.
The first one: seeing how central banks in places like Nigeria can’t offer enough dollar liquidity to SMEs. Trades such as those are made via BTC lots of the time. In return, BTC in part displaced the USD as the foreign trade currency of choice. Unless there is digital dollar liquidity provided without the geopolitical scandals and problems, the digital yuan will probably do so in total.
We have nations like Argentina and Lebanon, where there isn’t any social safety net, and the proprietary currencies are unstable. Here, BTC showed itself to be a safety net for countless customers. This is a humanitarian side of the story that many people from the States and western Europe have difficulties relating to.
The 3rd usage instance is exchanging worth on web-based communities. Circa 2 billion people reside in internet-founded communities that need web-based money to exchange worth. Frequently such digital natives will interact with other ones found in far parts of the globe, more so than with people living in the same building. Gamers know this well, and we are all becoming conscious of this shift.
The most significant instance of usage is DeFi that’s web-based. As calculated by TVL, decentralized financing is currently a $15B economies increasing monthly. That is a key reason why financial institutions have to incorporate cryptocurrencies – to acquire knowledge and plan for fast disruption. Decentralized financing is an important part of finance’s upcoming position. It will replace firewalled financial services that utilized firewalled capital with networked financial services that utilize networked web capital. Many who comprehend how the internet works know what this is going to bring.
The regulators changed their stance
When talking about law, we were no longer in 2019. The education and activism work that the community did 2015-2019 pushed regulators to see the inescapability and economic advantages of Internet-founded capital and finance.
I put the regulators into 3 overlapping groups. Some regulators appear to react harshly to cryptos and claim that it is not capital; they can comprehend and cannot be controlled. Thus it needs to be put out of use. Such regulators are simply attempting to impose stringent legislation with almost no nuance or discretion.
The next and most frequent group fear the instability caused by tech-led disruption but understand that there’s a real consumer requirement for web-based DeFi. For instance, regulators in Nigeria, India, and China made stringent moves to secure clients from scammers such as PlusToken and OneCoin while not often implementing rules against firms based on DeFi like BTC and ETH.
The third group is regulators who know that cryptocurrency innovation is a source of strategic benefits for the financial system they regulate. Every regulatory entity I have spoken to over the last few years has a minimum of a couple of such visionaries. Hester Peirce at the SEC or Brian Brooks of the Office of the Comptroller of the Currency have worked with the sector to develop a stable space for cryptocurrency innovation to deliver consumer advantages.
Regulators compete for innovation
On the other hand, the EU and India showed that SEPA, UPI, and similar fast and zero-cost domestic payment systems could operate well alongside tech already in place. The frameworks are already implemented. But, PoS experiences are still very much in infancy, and interchange charges and cross border payments are still a huge problem for the world.
In Europe, the issue was attempted to get resolved via a rule, committee, or a thin-thank. There were movements like the Payments System Directive 2 across Europe that were postponed or stopped by legacy institutions frequently based on valid cybercrime worries.
In the midst of all this, there is a struggle for innovation. Although the West is seeking to govern, the East carries on inventing. BTC and cryptos couldn’t have been enough of a sign for Western regulators on their own. But China’s central bank’s digital currency, like the DCEP scheme, has pushed for the issue of digital money. American and European regulators understand that if the future of capitalism is Chinese, China will be the dominant force in trade and military.
The case of China’s Digital Currency and Electronic Payments is significant since, in the first part of 2020, USA sanctions basically undermined Huawei. As an outcome, China recognizes that it can’t count on a global capital system regulated by the States or a domestic capital system overseen by Tencent and Ant Financial. Where does this leave the political system where policymakers are expected to control everything? If it does not control the capital, it does not control payments. It doesn’t have entry to transfers. The DCEP of China isn’t an experiment; it is imperative.
Now that China’s financial tech fear-of-missing-out wins over the cryptocurrency FUD, regulators are adopting a vastly different strategy for cryptocurrencies. The regulators think that if this will occur anyway, they should put it all in a banking framework instead of keeping the cryptocurrency sphere unregulated. That’s why Deputy Governor Jon Cunliffe of BoE said recently that regulators are not the ones supposed to protect financial institutions from virtual coins. He is just the first in line to admit that, you’ll see.
No one’s capital
What kind of capital will be used as a settlement currency in our fragmented yet connected world? Will we go East or West? Probably we’re going to need cash controlled by no one – cryptocurrencies.
Bitcoin was first developed to act as P2P electronic money, but BTC isn’t cash since it isn’t fungible. Besides, BTC requires layer two solutions to process bigger web-founded payments. Financial institutions and payment firms will assist in overcoming this problem. If I wish to transfer my BTC or pivot to a closed-loop system where my BTC addresses are in two addresses in the matching entity database, such as PayPal, that I do not actually have to move cash through a network, I can settle on a distributed ledger on a deferred basis. Through doing so, BTC or ETH will allow for a cross-border, world-wide settlement layer that enables cross-border transfers via digital instruments that no sovereign nation or private firm regulates. This trustless layer of settlement is needed in a split world in which the USD isn’t acceptable to others, like China, as the lone currency of settlement.
Banks using cryptos as gateways
Luckily, we still got open marketplaces in the West, where consumers and business people don’t wait for laws to set things right. Cryptocurrencies are also evolving. Crypto began with the idea of no credit, no debt. Certain BTC maximalists assumed that all of us would live off the bearer’s properties, but credit is important to society and capital. Cryptocurrency exchanges and companies like BlockFi had to build lending experiences that aren’t so different from the fiat money-founded services that we get from third-party partners today, but they’re a start.
The same as the rest of Fintech, decentralized financing is no new finance. It is a taste of the future of finance as the future of capital comes to fruition. Unlike financial technologies, which were busy introducing wooden and metal cards, the once overlooked cryptocurrency fringe switched quickly to programmable capital tokens. Intelligent agents such as Aave and Nexus Mutual have recently begun creating financial intelligence, banking functions, and nuanced statements straight in tokens like those. In the meantime, wallet providers such as Coinbase and Argent began to allow entry to decentralized finance services’ advanced features. In a few years, as tech advances more and the risk mechanisms for these decentralized protocols mature, decentralized finance’s much better experience will render it difficult for legacy systems to find dominance in the field of customer interaction or wallet sharing.
The future of capital is here. Pushed by user demand for cryptocurrencies, this is the future of capital where PayPal and Revolut already made their steps. If financial institutions want to ignore reality, they will become as obsolete as Blockbuster.
Where should the banks start from?
Experiential learning. They need to begin with licensing tech and services from cryptocurrency custodians and provide digital wallets that offer integrated entry to cryptocurrencies and fiat capital. This is a thing that Revolut has done especially well through collaborations with custodians and exchanges. It is not difficult for financial institutions to subject to regulatory approvals and enforcement approvals that can require time. It’s like having a digital gold locker just like financial institutions are now providing jewelry lockers and real estate documents, except that they’re going digital, beginning with BTC.
The 2nd phase connects with decentralized financing and cryptocurrency startups, even if it is in a learning space, and try out programmable, digital capital, and wallets. What would this self-custody situation look like? How do P2P, mutualized, web-based services needing no permission work? What chances for automation, transparency, and efficiency do DeFi services have? This is a significant learning curve for decentralized financing, too.
The 3rd phase is to switch from customized walled garden solutions to unauthorized distributed ledger services. Permitted ledgers are a solid move for financial institutions to try out a shared-operating model based on shared information and shared logic. The time for “less closed yet not totally open solutions” has passed. Now we should utilize all our knowledge for the open webspace.
All in all, to survive, financial institutions need to think wider than shallow smartphone applications and design payments and financing experiences for a much more sophisticated user who is moving to networked services with programmable capital. That’s why the incorporation of cryptos into banking applications and services is important. No time should be wasted in this field anymore.