Banks Adapt as Money Goes Digital

Jim Cargill Commentary

Banks Adapt as Money Goes Digital

A complex and rapidly evolving ecosystem of digital first cryptocurrency-related products has arisen in the financial world. Because it’s digital and highly programmable, crypto, as it is often called, can support a variety of new uses that increasingly resemble products and services offered by traditional financial institutions.

Cryptocurrencies are one of a few types of digital assets representing a new form of money, sometimes referred to as a “digital version of cash controlled by a private cryptographic key.” There are four primary categories of digital assets:

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  • Cryptocurrencies,
  • Stablecoins,
  • Central Bank Digital Currencies (CBDC) and
  • Non Fungible Tokens (NFTs).

Banks will need to become familiar with and understand each type, but here, we’ll focus on cryptocurrencies.

Cryptocurrencies are independent digital currencies that are not controlled by a government or bank. Examples include Bitcoin and Ethereum. Cryptocurrencies were initially developed and designed to be used to facilitate payment transactions. While there are some companies that accept various cryptocurrencies as payment for goods or services, the volatility of these assets has limited their adoption. Therefore, the primary use for cryptocurrencies today is as an investment in a scarce asset. In fact, a survey published last summer by the University of Chicago found that 13% of Americans had invested in cryptocurrency during the past year.

However, as the market develops, new uses will continue to emerge. One is using cryptocurrencies to send money overseas rather than using traditional bank payment rails or money transfer services. In this use, crypto volatility is problematic. Currency stability is crucial because stability helps merchants and consumers determine a fair price for the goods and services. In 2021, the valuation of Bitcoin, for example, bounced between $30,000 and $68,0000 per bitcoin, with volatility being the only constant since crypto markets never close.

This volatility is why cryptocurrencies are generally defined as a speculative asset class. It remains to be seen how much cryptocurrencies will be a part of future investment portfolios, but generally it’s believed they will continue to lag behind more traditional investments.

Due to the increasing popularity of cryptocurrencies over the last two years, bank regulators are focusing more time on providing clarity to banks about engaging in this new market. For example, in July 2020 the Office of the Comptroller of the Currency issued a letter stating that national banks and federal savings associations have the authority to provide custody services for customers with respect to cryptocurrency and other digital assets.

As digital assets continue to progress, banks are looking for opportunities to both educate their customers about and offer their customers access to these assets. A recent survey by institutional crypto trading and custodial firm New York Digital Investment Group found that 80% of existing bitcoin holders would move their bitcoin to a bank if they could.

Most in the banking industry expect to see regulators take a close look at consumer protection and the growing concern relating to the safety of digital assets. Agencies such as FinCEN, the Treasury Department’s Financial Crimes Enforcement Network, have hyper-focused on this issue, placing microscopic attention on the crypto industry. A partnership between traditional banking institutions and crypto providers will place the burden of regulatory doubts upon shoulders on both sides. Additional questions in a fintech partnership could include privacy and security controls, the use of customers’ data, scope of appropriate disclosures concerning crypto products and their risks, and the procedures in place to ensure customers are whole should some fraudulent behavior occur.

The bottom line for bankers? Cryptocurrencies are here to stay, and as more bank customers engage with them, the banking industry needs to stay informed if it hopes to retain the role of trusted financial adviser to its consumers. In addition, it needs to stay nimble to adapt to the ever-shifting digital landscape being shaped by new technology innovations such as cryptocurrency offerings.

Jim Cargill is president and CEO of Arvest Bank in central, northeast and southwest Arkansas chairman of the Arkansas Bankers Association and chairman of the Little Rock Regional Chamber.