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By Mike Romanenko
The integration of cryptocurrencies into the global banking system has been a topic of ongoing development and discussion. The level of integration can vary significantly from one region and financial institution to another, and it is constantly evolving. This article explores the current situation on the market.
Almost a decade after the appearance of Bitcoin, the economic impact of cryptocurrencies has become impressive.
Despite the growth of cryptocurrencies, traditional banks are still hesitant to adopt these digital assets, believing their inherent risks outweigh their potential benefits. However, regulatory agencies such as the Office of the Comptroller of the Currency (OCC) in the US are working to change banks’ perception of digital currencies, believing these assets could positively drive financial institutions to a new era of innovation and efficiency.
Cryptocurrency economic impact
The world of cryptocurrencies offers multiple positive advantages that change the global economic landscape by benefiting countries with unstable or fluctuating economies. Today, the number of employees in the blockchain industry increased from 1,000 in 2016 to more than 4,000 in 2017, and it only keeps growing each year. Many people either use cryptocurrencies to better their financial situation or rely on crypto as their primary source of income and wealth generation. As different Western countries continue crypto legalisation, we can expect an increase in investment and employment in this field.
In its current state, Bitcoin reduces the transaction fees for the investors. Since digital currencies and blockchains are decentralized agents, there are no additional costs that investors have to consider. Unlike a conventional bank, users do not need to pay utility bills, rental property, or employee salaries. The zero transaction cost fosters trust in the cryptocurrency system, bringing the digital economy to the new age. While cryptocurrency transactions benefit from full automatization and reduce the danger of corruption, it does not mean they are exempt from external attacks.
Top banks that embraced crypto
In 2021, when the crypto bull run was at its peak, 55% of the top 100 banks had some stake in the blockchain world, whether it be crypto assets or investments in blockchain-based companies. When the bull run ended, crypto assets were generally dumped, as is usual in a crypto bear market. This translated to falling prices and low investor confidence in the sector. However, this encouraged banks. Instead of investing directly in cryptocurrencies to profit from them, banks started focusing on individual projects in the blockchain industry. Of course, they would receive a handsome amount of tokens in return for their investments. From 2021 to 2022, at least 23 banks have invested in crypto. These included big names like Morgan Stanley, BNY Mellon, Citigroup, and United Overseas Bank. The following figures are derived from an analysis of the fundraising rounds of various blockchain startups and companies by banks.
Why banks are cautious of cryptocurrencies
According to a study conducted by the Association of Certified Anti-Money Laundering Specialists, nearly 63% of respondents who work in the banking industry perceive cryptocurrency as a risk rather than an opportunity. Most of these concerns are based on crypto assets' decentralized nature. A cryptocurrency that a central bank manages diminishes the asset's appeal in the first place, so some banks don’t believe they’ll be able to enter this space successfully. The decentralized nature of the currency is seen to undermine the authority of central banks, leaving some to believe that they won’t be needed anymore or they’ll be unable to control the money supply. Another concern of the global banking system is the crypto peer-to-peer transactions without a regulated intermediary. This type of pseudonymity leaves the impression that AML and KYC can’t track cryptocurrency transactions, which could lead to illegal activity and scams.
The future of the global bank system integration with the cryptocurrency Industry
Banks need to find a way to embrace technology to stay caught up. Cryptocurrency adoption could streamline, enhance, and upgrade financial services while getting the potential benefits. Previously, OCC stated that banks could provide crypto custody services for customers, including holding unique cryptographic keys associated with accessing private wallets. This means that the OCC believes that banks could safely and effectively hold either the cryptocurrency itself or the key to accessing crypto on a personal digital wallet for its customers. Using crypto also means unleashing the potential of attracting new individual investors. For example, inexperienced cryptocurrency investors may need the capabilities to set up their wallets to custody their cryptocurrency. Rather than leaving their cryptocurrency “off-exchange” or at an unregulated third party, they may find it easier and more secure to hold it within a trusted financial institution.
Banks could offer interest-bearing crypto accounts, where customers could invest the crypto on the back end or through other financial tools.
In 2019, the Financial Crimes Enforcement Network determined that any cryptocurrency transactions and custody services conducted through crypto entities that are considered money service businesses must still abide by AML/KYC regulations. This will help avoid malicious transactions, illegal activity, or scams. These regulations could help banks and larger financial institutions conduct due diligence on customers involved in crypto transactions, further diminishing their anxieties about these transactions' risks. Moreover, blockchain technology could automate AML and KYC verifications. Blockchain could potentially allow for a streamlined view of shared data on individuals between banks, loan officers, and other institutions.
Speaking about another security aspect, Banks can help mitigate the security concerns of cryptocurrency holders, such as hacking of personal wallets and exchanges. Bringing cryptocurrency under bank supervision could help diminish criminal activity or the appearance that cryptocurrency transactions are not secure to outsiders. Banks can also utilize public blockchains, including stablecoins, to speed up their payment processes. Another thing that the global banking system could adopt is establishing trust among clients by becoming a reliable third party that utilizes these smart contracts for mortgages, commercial loans, letters of credit, and other transactions.
To conclude, guidance and regulation surrounding digital assets is sparse, leaving many financial institutions wary of adoption. Cryptocurrency is a relatively new and rapidly evolving space, so it’s essential to stay informed about regulatory changes and security risks associated with cryptocurrencies. Concerns surrounding the security and stability of cryptocurrency also hold banks back from entering this space — but instead of fearing the risks of this technology, banks should be looking ahead to its potential benefits. Apart from the potential threats, economic growth has enormous potential. Despite the existing challenges, many people see cryptocurrencies as an attractive investment opportunity, and banks can play an essential role in facilitating these transactions. As cryptocurrencies continue to gain mainstream acceptance, more banks will likely become crypto-friendly in the future. Financial institutions should shift from thinking of crypto as a competitor to that of a partner. Banks can play a significant role in the crypto industry, adding some much-needed assurance and security to the largely unregulated environment. Adopting cryptocurrencies and blockchain technology overall can take banking into the next generation of efficiency and innovation.
Author Bio
Mykhailo Romanenko – co-founder of the global fintech ecosystem and crypto exchange Kyrrex (https://kyrrex.com/)
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.