Traditional financial institutions continue to demonstrate multiple use cases for digital asset support, together with DeFi capabilities, despite the current market conditions.
The crypto industry is the Wild Wild West in comparison to the traditional financial service providers, yet several banks are showing lots of interest in digital assets and decentralized finance (DeFi). This year in particular has been significant for banks exploring digital assets.
Most recently, JPMorgan showed how DeFi can be used to enhance cross-border transactions. This came moments after BNY Mellon – America’s oldest bank – announced the launch of its Digital Asset Custody Platform, which enables exclusive institutional clients to hold and transfer Bitcoin (BTC) and Ether (ETH).
The Cleaning House, a US banking association and payment firm, stated on November 3 that banks “should be no less able to engage in digital-asset-related activities than nonbanks.”
Banks Are Aware Of Potential
While the banks continue to show interest in digital assets, BNY Mellon’s 2022 Survey of Global Institutional Clients shows increasing demand from institutions looking to access digital assets via reputable custodians.
According to the survey, nearly all of the 271 institutional investors (91%) are interested in investing in tokenized assets. This survey also discovered that most of the investors are using more than one custodian, with 35% doing business with traditional incumbent players.
The increased demand from institutions looking to access digital assets is one of the key reasons why banks are showing interest in crypto and decentralized finance (DeFi) offerings.
The CEO of Bitstamp USA, Bobby Zagotta, told reporters that Bitstamp has got lots of inbound requests recently for their Bitstamp-as-a-Service offering, which enables fintechs and traditional financial institutions to give clients access to crypto. He stated:
“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.”
Zagotta added that banks currently not aiming to implement digital asset offerings will lose significant 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 now engaging with digital-native platforms instead of traditional financial players. Nonetheless, BNY Mellon’s findings also show that 63% of surveyors would accept longer settlement times to transact with a reputable traditional institution.
Furthermore, some sector experts think that big banks can advance their operations by implementing cryptocurrency and decentralized finance solutions. The global head and leader of institutional capital at Ethereum layer-2 network Polygon, Colin Butler, said that while the pilot trade done by the Monetary Authority of Singapore and JPMorgan was a milestone toward the adoption of decentralized solutions, it also shows that these entities are now testing to see where DeFi infrastructures are beneficial.
“If the answer is ‘yes,’ then it would allow them to significantly increase the efficiency of their operations.”
Butler explained that Polygon’s proof-of-stake blockchain guaranteed that the cross-border transaction done between the Monetary Authority of Singapore, JPMorgan, and other banking entities was secure, quick, and as cost-efficient as possible. He added:
“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.”
Reiterating Butler’s opinion, the chief growth officer at METACO, Seamus Donoghue, said that he thinks that all the financial assets will eventually get represented on distributed ledgers. METACO is a digital asset custody provider for huge financial institutions. In that context, Donoghue said that there is an imperative to redesign the financial market network. He added:
“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.”
Donoghue also said that banks will eventually become the bridge for institutions that are looking for exposure to digital assets and decentralized finance. He explained that this is because traditional financial institutions have large balance sheets, consumer trust, and a network of market participants which creates liquidity, coupled with a customer base that has unmet needs.
Nevertheless, traditional financial institutions remain worried about regulations. The head of client and tech solutions at SEBA Bank, Mathias Schütz, said that traditional banks are hesitant to engage with digital assets due to regulatory uncertainty. (SEBA Bank is a Swiss-based digital asset bank).
To resolve this, Schütz noted that SEBA Bank, which is fully licensed by Swiss regulators, operates as a trusted counterparty for institutions to engage with digital assets. He mentioned:
“This is why SEBA Bank has been able to partner with a number of major banks in 2022, including LGT Bank, the world’s largest family-owned private bank.”
It is also critical from a consumer’s perspective, as findings from BNY Mellon’s survey note that investors are majorly worried about digital custodians’ legal and regulatory infrastructures.
Will Market Turbulence Affect Interest In Digital Assets And DeFi?
Apart from regulations, the recent turn of events with FTX US and Binance might affect how traditional financial institutions view digital assets. While it is too soon to understand the involved consequences of the debacle, Donoghue said that the FTX US and Binance shakeup might have a near-term effect. He stated:
“It could shift banks’ strategies to skip cryptocurrency services, and focus exclusively on digital securities more broadly, at least temporarily.”
One regulatory expert at Thomson Reuters, Eric Berman, said that he does not think this event will quicken bank involvement in digital assets.
“Banking institutions have taken it slow with crypto as it is. The FTX US and Binance situation probably underscores to the banking sector that it has done the right thing in taking a pragmatic approach.”
Either way, both Berman and Donoghue know that this event shows the need for more regulatory clarity before traditional financial institutions can innovate using digital assets. Donoghue added:
“The recent negative industry events have emphasized the critical need for safe and compliant infrastructure, business practices, and regulatory oversight. So if anything, the demand for asset servicing from trusted institutions such as regulated global banks has only increased.”
It is also important to point out that BNY Mellon’s survey examined how the Terra ecosystem collapse has affected institutional investors. Based on the report, 9% of institutional asset managers said that the Terra collapse has not affected or altered their digital asset plans, while 50% said that they took a short-term pause to reassess, noting that they will continue with their operations soon.
Looking at whether the current bear market will affect banks’ interest in digital assets, Butler said that the crypto space is not much of a factor affecting banks, mainly when it comes to decentralized finance. For example, he said that JPMorgan used Polygon to do a live cross-currency transaction that featured tokenized Singapore dollar and Japanese yen deposits, together with a simulation of tokenized government bonds.
Based on the statement by Butler, the assets do not correlate with crypto prices. He concluded:
“Essentially, financial institutions are looking for ways to tokenize traditional assets — and this could be anything, from bonds and fiat currencies to real estate deeds — and transact them digitally. As such, these tokens retain the value of their ‘original’ assets, so this is more about the technology itself rather than crypto prices and bear/bull markets.”