By Lou Grilli, Sr. Innovation Strategist for Primax
Banks that are considering dipping their toes into the proverbial waters of cryptocurrency services for their customers must consider the risk of doing so. There are counter-party risks, regulatory risks and reputational risks, among others. There are also risks for not engaging with crypto – such as being left behind, being perceived as not progressive, not educating your customers and allowing them to find the services they want elsewhere.
News of the devaluation of digital currencies and layoffs at cryptocurrency exchanges have led many to question the future of crypto – is the current state of the industry just a bump in the road or the start of crypto’s decline? While time will only tell, here are various aspects to take into consideration when deciding if participating in cryptocurrency is right for your bank.
Services that Banks Could Offer
Holding digital assets on your ledger is not something that can be considered at this time, as being a custodian of decentralized cryptocurrency represents volatility, which could cause harm to the insurance fund that backs our trust in the financial system. Even stablecoins, until they become regulated, represent a risk to asset valuation, despite their name.
However, there are services that can be offered in this space that do not involve holding assets on your books. The most common is to offer buy/hold/sell from within your digital banking platform. Offering a digital wallet that can store cryptocurrency coins, stablecoins, non-fungible tokens (NFTs) and digital identity is the modern version of a safe deposit box to store coin collections and trading cards. Despite hosting a branded wallet holding the digital assets, these assets belong to the owner, not to the financial institution, much like storing a diamond collection in a physical safe deposit box does not put the financial institution at risk of the price of precious stones collapsing. Financial institutions could also offer rewards on a credit card program, with the cash-back in the form of cryptocurrency.
Risks of Offering Crypto Products
There are certainly risks for financial institutions who decide to offer services to their customers related to digital assets. There is the risk that the third party you choose to partner with doesn’t provide the services your customers are seeking. Or worse, the third party has a business failure, and their insurance doesn’t completely cover all the losses. Another risk is the partner not having the security controls in place to prevent a cybercrime, despite your best due diligence efforts to assess their safety and security.
Regulatory risk is also a concern – the risk that whatever service you are currently allowed to offer becomes prohibited. Some financial institutions are starting out with a limited service, made possible by teaming up with third-party crypto services to allow customers to only purchase, hold and sell bitcoin. At the same time, some crypto enthusiasts are looking for additional options, such as other coins, and may be looking for more flexibility, such as the ability to transfer their holdings to an offline digital wallet or transfer their cryptocurrency to another person.
Reputational risk is also an important and real consideration for banks. One possible scenario: a customer invests a substantial portion of their life savings through your cryptocurrency buy/hold/sell portal and loses half of it, despite your financial institution’s education about risks and volatility. The customer could potentially voice their displeasure in public forums, like social media.
Finally, there is the risk of the unknown. It is hard to see what the future of cryptocurrency will look like. Will it be a fad that fades away? Will the price of bitcoin keep crashing down or soar to new heights? Will the promise of utility, especially for stablecoins, finally be realized, or will it remain speculative? Only with time will we have answers to these and similar questions.
Risks of Not Offering Crypto Products?
While there are risks associated with offering services related to digital assets, there are also risks of not participating. When other financial institutions in your market begin to offer products like cash back in the form of crypto on a rewards program, your financial institution may be viewed as not progressive if you don’t. And by not offering buy/hold/sell, you risk being intermediated when your customers find their way to an exchange and discover that they can get a debit card, a credit card, loans, better savings rates and have their paycheck direct deposited. Just about every financial institution is seeing funds flow from their accounts to the major cryptocurrency exchanges. The amount of Automated Clearing House Network (ACH) transactions in dollars from financial institutions to the exchanges has grown tenfold each year for the last three years. There is no reason to believe that this will not continue.
Banks that are offering cryptocurrency purchase have realized non-interest income and see daily interactions twice as high by those individuals who purchase crypto as interactions by those who don’t. And most importantly, by satisfying the needs of the “crypto-curious” with a safer alternative than what the exchanges offer, customers are not going to websites set up as scams or purchasing crypto with high hidden fees.
What Should Banks be Doing?
There is no one-size-fits all answer to the question – should we offer crypto services? The consensus of your Board of Directors, the comfort level of your Chief Compliance Officer, and the demographics of your customer base are different than every other financial institution. It is still relatively early in the world of cryptocurrency and the space continues to rapidly evolve – faster than regulators can keep up with, and faster than Congress can make laws. Taking a wait-and-see approach is a valid strategy – however, completely ignoring this trend is not.
It is important to have ongoing discussions at the Board and senior staff levels, follow news and developments on cryptocurrency, and monitor the flow of funds on debit cards and ACH transactions from your customers’ accounts to the exchanges. Leveraging the resources available to you from fintechs or industry organizations, like Primax’s innovation microsite, is another great step to stay informed in the evolving digital assets landscape.
Lou Grilli is a Senior Innovation Strategist tasked with building and shaping a superior payment and banking experience capability. Lou is currently focused on real-time payments and cryptocurrency. He participates on the U.S. Faster Payments Council and is named on a patent for the use of blockchain for loyalty programs. Lou holds an MBA from Duke and a master’s degree in Computer Engineering from the University of South Florida.
