When it comes to serving the fast growing and highly dynamic ecosystem in digital assets, banks have an emerging yet essential role. But across jurisdictions, customer segments and regulatory environments, no two institutions are exactly alike – and this is especially true in crypto. So how can leading FinTech operators approach this highly diverse group as the market evolves, and what are the strategic shifts currently in play?
Dennis Wohlfarth, co-founder and CEO of Cense, was an early crypto enthusiast. Today, he’s part of a group of pioneering companies serving the full digital asset value chain, so he’s well placed to observe the evolution of the ecosystem and the innovative banks that are increasingly at its heart.
“In the last 10 to 11 years, everything has changed”, he says. “We’ve seen banks and institutions coming into the space for the first time, and a lot of regulatory interest. And in that time, crypto has evolved from a revolution in finance to a completely different asset class in its own right.”
The four stages of crypto adoption
Wohlfarth and his team have charted the evolutionary progress of the banking take-up of crypto to create what you might call a maturity roadmap. “We separate the banking journey into four distinct stages – from stage one, which is where financial institutions steer clear of virtual assets and the complexities of blockchain, all the way to stage four, which we refer to as ‘all-in adoption’. This is where banks fully embrace digital assets and integrate them with their traditional offerings to provide a seamless range of services.”
Every bank is somewhere on this continuum – and some are moving along it at pace.
“Right now”, he notes, “many banks have progressed to the second stage of adoption, which is fiat-only exposure to crypto. In other words, they’re accepting fiat currency inflows from the proceeds of crypto wealth. The banks see a lot of value here because this wealth has to go somewhere.”
An attitudinal shift
Cense Chief Commercial Officer Michiel Hoogenboom has also spotted an attitudinal shift in the banking community. “For maybe the last 18 months we’ve seen the market starting to turn more positively, and there’s a realisation that crypto assets are here to stay. As a result, bank leadership is getting on board”, he says.
“Now we’re seeing rapid evolution in the market, towards the full adoption of client-facing crypto services, with banks taking a variety of different approaches, from building out guard-rails first, to starting off with their tech infrastructure. Some are initially focused on customer acquisition, followed by the build-out of their technology as the client base grows.”
“At Cense, we’re here for banks, no matter what their shape, size and attitude to crypto. So, this means providing everything from remediation services for the banks who aren’t yet involved in crypto but whose customers are, all the way to providing compliance and due diligence functions for banks with more significant exposure.”
“Overall, the direction of travel is towards greater crypto service integration, where some banks are establishing crypto as separate P&L line. This is a clear signal of maturity and readiness.”
Michiel Hoogenboom
The current state of play
According to Hoogenboom, the evolving ‘mood music’ among crypto-inclined banks is one of increasing integration – a marked shift away from pure experimentation at the margins of the market. “They are now saying ‘we’ve done our experiments, now how can we get scale and scope in the organisation?’”
This welcome evolution is creating its own issues. There’s the immediate communications requirement in the form of marketing, an onboarding and compliance challenge to keep up with regulation, and a need for more advanced product development, not to mention the upskilling of existing in-house teams. All at the same time.
What’s next? Continued evolution
Looking ahead, Wohlfarth predicts the inevitable take-up of tokenised assets, with blockchain technology as the ultimate backstop of transparency. This means that banks need a firm view of what their future customers will look like.
“Senior executives”, he observes, “should think about what they want to offer, especially in private banking. What’s the value proposition, long term? What will a 20 to 30 year old who’s very deep in crypto going to want from a bank 10 or 20 years from now?” It’s a question that requires careful strategic thought rather than a crystal ball.
To prepare for the coming wave of widespread adoption, Hoogenboom adds that there’s no one-size-fits-all approach for the banking community. “It’s important as a bank to find the approach that works for your size and position, as well as your attitude to risk, and then establish your own milestones as you evolve. This means setting the right compliance approach at the outset, then building it out together with your tech infrastructure and your service offering.”
“One of the key issues is to understand the technology and what it can enable for your bank – such as yielding, staking and stablecoin issuance. There’s a lot of money to be made in that area.”
Dennis Wohlfarth
Dennis Wohlfarth signs off with a short-term objective, allied to a note of enthusiasm and support for the evolving cohort of younger crypto investors. “In my opinion, right now it’s all about getting the innovation embedded and stable within banks, and to attract the next generation so they feel safe and they feel heard.”
Now it’s over to the banks.
Copyright © 2018 RegTech Analyst
