It’s Time for Banks and Credit Unions To Support Crypto

by Pamela Michaels Fay

 

Which banks support cryptocurrency and how many are taking a wait-and-see attitude? According to Boston Consulting Group and other industry experts, those who are on the fence shouldn’t wait too long. Cryptocurrency is apparently here to stay. That means that even the regional banks and credit unions should be thinking about how to support crypto in their banking platforms, digital and otherwise.

Banks and credit unions haven’t wanted to jump on the crypto bandwagon. That hesitation was for good reason. In the early days of Bitcoin and other digital currencies, financial institutions wondered if this was real or just a passing (and doomed) fancy. For such a traditional and heavily regulated industry, the caution was understandable. In the early days, it didn’t seem likely that the inherent risks would outweigh the benefits of this new payment technology. 

These days, however, the Office of the Comptroller of the Currency (OCC) believes these cryptocurrencies could drive innovation and efficiency. The OCC has recently issued letters telling traditional financial institutions how they could develop crypto services, the first official indication that they are warming to the idea. In January 2021, the OCC announced that banks and federal saving associations could use public blockchains and stable coins for payments. Some were already doing so but with a third-party agency. 

This announcement was good news for the crypto industry, putting the currency in the same category as ACH, SWIFT, Fedwire, and other money transfer systems. These actions define the future of cryptocurrency, making it a sanctioned part of the banking ecosystem. That doesn’t mean, however, that the wariness went away. Financial institutions are still concerned about risk and increased due diligence.

The Increasing Demand for Crypto

In 2014, New York regulators worried that putting rules and directives around cryptocurrency would legitimize it. Jamie Dimon, chief executive of JP Morgan Chase, said that Bitcoin, the most popular of all the digital currencies, was being used for illicit purposes and did not have enduring value. Today 220 million people use digital currency, with 75 million using Bitcoin. Since then, JPM Chase has created its own crypto. Dimon, however, still believes that Bitcoin is worthless.

Meanwhile, people around the globe are embracing digital currencies. Traditional financial institutions in the U.S. lag behind. Alternative banks, credit cards, consumer loans, even Paypal have jumped on the cryptocurrency bandwagon. In El Salvador, Bitcoin is accepted as legal tender. It’s not yet recognized as legal tender in the U.S., but the trend is positive. It’s already part of the U.S. derivatives market and is accepted by businesses like Whole Foods, Home Depot and Microsoft.

The central bank is mulling it over. And while the opinions at the Federal Reserve seem ambivalent at best, Jerome Powell and his indispensable advisors are observing national banks around the world, soliciting information and paying close attention to this $2 to $3 trillion market.

Even as Dimon continues to slam Bitcoin and Bank of America CEO Brian Moynihan bars its wealth managers from putting client money into crypto-related investments, many banks are admittedly crypto-curious. In 2020, Bank of America filed patents around digital payments. According to BoA spokesperson Mark Pipitone, it’s not clear where they’re headed, but they are surely on the train. Other institutions like Bank of New York Mellon and Northern Trust are working toward custodial services that hold Bitcoin. 

What Are the Stumbling Blocks?

Cryptocurrencies, unlike fiat money, are not controlled by the reserve bank. Trust comes from the decentralized nature of the blockchain algorithm rather than from a centralized authority. Cryptocurrencies are, in fact, touted as an alternative that does not require an intermediary. So having crypto controlled by banks seems to undermine the decentralized advantages of the currency. 

Plus, there are concerns about the anonymity surrounding cryptocurrency and the perceived lack of AML and KYC controls. This is of particular concern with the high-risk exchanges. The prevailing belief is that these currencies can’t be tracked, which isn’t true. 

The other large concern is price volatility. This volatility occurs because the price is driven by market demand and liquidity. Drops of 30% to 40% are not unusual. Corrections are equally as dramatic. Clearly, cryptocurrency is not for the faint of heart. Also, the demand is inelastic. The supply of, for example, bitcoins, will never exceed 21 million. No amount of demand will increase the number of coins in circulation.  

These concerns mean that some see crypto as a risk rather than an opportunity. Many banks wonder why they would enter the cryptocurrency space at all. It’s a valid question.

While critics of the current system point out that the central bank was largely responsible for the financial crisis of 2008, there are many good reasons to maintain an authority bank that stabilizes jobs, prices, and the economy. In addition to their second-class status to fiat money, cryptocurrencies have their own issues, including the limited supply. But cryptocurrencies like Bitcoin are very secure and cannot be counterfeited. The combination of the two offers intriguing possibilities in the future of banking.

Why Banks and Credit Unions Need To Get In Now

The pandemic hastily ushered banks and credit unions, ready or not, into the digital era. Crypto is the next big thing on the horizon. Financial institutions have been talking about a cashless society since the middle of the 20th century. Security was always one of the biggest obstacles, although there are cultural barriers as well. Blockchain technology handily dispenses of the security issue. 

The popularity of alternative financial solutions means that the competitive environment is rapidly changing for banks and credit unions. In October 2021, Mastercard stepped up the game by announcing that it would soon allow the merchants on its payment network to integrate cryptocurrencies into its products.  

So which banks support cryptocurrency? The largest players are quietly and relentlessly working to figure out their crypto strategies. If hiring is any indication (and it is), there’s something to see here. In addition to JPMorgan Chase and Bank of America, Wells Fargo and Goldman Sachs are hiring crypto experts. Morgan Stanley began offering blockchain investment products back in 2018. Other banks — more than 100 and counting — have tested Ripple, a cryptocurrency payment settlement system. 

The big guys are understandably tight-lipped about the direction they’re headed. But experts like the aforementioned BCG see greater efficiency and transparency in the industry’s future. To ignore this new currency is to turn a blind eye to the evolution of banking. Despite the day-to-day volatility that gives investors heartburn, cryptocurrency gains can be impressive and surprisingly stable over the long term. 

Getting Prepared for Crypto

Smaller banks and credit unions that want in will need to hire accordingly. Once they have experts on staff, they’ll be able to put together cryptocurrency offerings for their clients. There’s another big job to do as well: That is to ensure that regulators are creating rules that help banks to prosper in the alternative financial world. 

If banks and credit unions fail to act, the stakes are high. Digital currencies actually do pose a threat to the centralized role of traditional financial institutions. These financial institutions will either need to get in the game or observe from the sidelines the deterioration of their historical prominence. Investors and customers want digital currencies. It’s time for banks and credit unions to acknowledge that the rules are changing and the goalposts are higher. The cryptocurrency revolution has arrived. 

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Pamela Michaels Fay is a business, financial, technology, legal and lifestyle writer, whose work is informed by over 20 years of strategy, leadership and organizational development consulting for Fortune 500 companies.

References:

Boston Consulting Group – How Banks Can Succeed With Cryptocurrency

Fortune – JPMorgan’s Jamie Dimon Shares His Personal Belief ‘That Bitcoin Is Worthless’

Yahoo Finance – 10 Major Companies That Accept Bitcoin

Investopedia – Where the Fed Stands on Crypto and Digital Currencies

New York Times – Banks Tried To Kill Crypto and Failed. Now They’re Embracing It (Slowly).

CNBC – Bitcoin’s Wild Price Moves Stem From Its Design — You’ll Need Strong Nerves To Trade It

CNBC – Mastercard Says Any Bank or Merchant on Its Vast Network Can Soon Offer Crypto Services

Yahoo FInance – Here’s Why Big Banks Are Going All In on Crypto: Should You Follow Suit?