The cryptocurrency sector is the Wild Wild West in comparison to traditional finance, yet a number of banks are showing interest in digital assets and
The cryptocurrency sector is the Wild Wild West in comparison to traditional finance, yet a number of banks are showing interest in digital assets and decentralized finance (DeFi). This year in particular has been notable for banks exploring digital assets.
Most 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 select institutional clients to hold and transfer Bitcoin (BTC) and Ether (ETH).
The Clearing House, a United States banking association and payments company, stated on Nov. 3 that banks “should be no less able to engage in digital-asset-related activities than nonbanks.”
Banks aware of potential
While banks continue to show interest in digital assets, BNY Mellon’s 2022 Survey of Global Institutional Clients highlights increasing 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 are using more than one custodian, with 35% conducting business with traditional incumbent players.
The heightened demand from institutions seeking access to digital assets is one of the reasons why banks are showing interest in cryptocurrency and DeFi offerings.
Bobby Zagotta, CEO of Bitstamp USA — a cryptocurrency exchange founded in 2011 — told Cointelegraph that Bitstamp has received many inbound requests recently for their Bitstamp-as-a-Service offering, which allows fintechs and traditional financial institutions to give clients access to cryptocurrency.
“Last year, fintechs were asking Bitstamp about services to support cryptocurrency. This year, fintechs have been discussing the downsides of not offering clients access to digital assets. Banks are waking up to the fact that there is client demand to buy and sell crypto, and if people can’t do this with their banks they will go somewhere else,” he said.
Zagotta added that banks currently not looking to implement digital asset offerings will lose market share: “Banks are realizing that they could be creating a customer retention problem if they don’t come to market with crypto offerings.”
To Zagotta’s point, BNY Mellon’s survey found that 65% of institutions are currently engaging with digital-native platforms rather than traditional financial players. However, BNY Mellon’s findings also indicate that 63% of surveyors would accept longer settlement times in order to transact with a highly rated traditional institution.
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Moreover, some industry experts believe that large 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 trade conducted by JPMorgan and the Monetary Authority of Singapore was a milestone toward the adoption of decentralized solutions, it also demonstrates that these entities are testing to see if DeFi frameworks are beneficial.
“If the answer is ‘yes,’ then it would allow them to significantly increase the efficiency of their operations,” he said.
Butler elaborated that Polygon’s proof-of-stake blockchain ensured that the cross-border transaction conducted between JPMorgan, the Monetary Authority of Singapore, and other banking entities was fast, secure, and as cost-efficient as possible. He said:
“All of these elements are extremely important when it comes to DeFi adoption. The inherent efficiency of blockchain-based solutions is what gives DeFi an advantage over traditional financial systems that have been built over the past decades. While they’re still ‘working,’ these frameworks are very rigid. The latest advancements in DeFi can help make the whole process of transacting significantly more efficient and convenient.”
Echoing Butler, Seamus Donoghue, chief growth officer at METACO — a digital asset custody provider for major financial institutions — told Cointelegraph that he believes all financial assets will eventually be represented on distributed ledgers. As such, Donoghue mentioned that there is an imperative to redesign the financial market infrastructure.
“This is the reason why virtually all tier-1 banks are now investing in building new infrastructure: not for the currently bearish crypto market, but for the much larger vision of how every asset will be represented and how value will be created and exchanged, 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 due to the fact that traditional financial institutions have consumer trust, large balance…
cointelegraph.com