Banks and financial institutions were shockingly slow to respond to the rise of fintech - now they are in danger of making the same mistake with the rapidly emerging crypto banking sector.
While legacy players sit on the sidelines, the likes of
SEBA and Wirex are racing to develop banking products and services that support the cryptocurrency ecosystem; building bridges with the more established world of fiat finance in the process. Not to be overlooked either
is the crypto ambition of the tech giants.
The banking sector’s inertia comes despite the
rapidly growing value of the cryptocurrency market and the increasing number of
central banks and
national regulators in well-developed financial markets that are making provision for the crypto economy.
Big bank hesitation is understandable given some of the earlier bad press crypto has attracted and the perceived complexity of playing in this space. But here are four compelling reasons why the financial services sector needs to revisit crypto banking as
a matter of urgency:
Covid is creating increasing demand for crypto
During the Covid-19 pandemic, while faith in established banks
has been shaken, confidence in crypto-based currencies
is slowly on the increase. One tangible reason why the crypto economy has weathered the 2020 storm relatively well is a perception that digital currencies may be a way to offset the impact of the economic fallout from the pandemic. For example, with crypto
seen by many as possible insurance against the global rise in quantitative easing, it is starting to attract
interest from institutional investors. With further quantitative easing and devaluations likely as countries try to manage the twin economic impact of Covid and an increase in trade barriers, when it comes to portfolio management, holding fiat currencies
will remain a less attractive option for some time to come. As a result, crypto is well placed to play an (albeit small but potentially growing) role in investment portfolios.
Crypto is taking off in emerging markets
Looking beyond the volume of crypto currency trading, it’s interesting to note that the crypto economy is enjoying rapid growth in emerging markets. Africa has become a hotspot for crypto trading, with high levels of activity now taking place in Nigeria
and South Africa. A new study by Norway-based
Arcane Research, in partnership with crypto exchange Luno, concludes that Africa is arguably “the most promising” region for the adoption of cryptocurrencies because of its combination of high inflation rates, volatile currencies, weak banking infrastructure,
and a tech-savvy young population. With markets like Mexico and India also embracing crypto, a clear message is that digital currencies thrive in markets where there is a level of fragility in the
more traditional banking infrastructure. For legacy banks looking to expand into developing markets, this makes crypto banking an intriguing and potentially attractive proposition.
Crypto’s potential as a Trojan Horse into FS
There are plenty of rivals seeking to break the stranglehold that big banks have on financial services – and one way to achieve this is by offering products and services that the incumbents don’t. As such, crypto is one way for challengers to gain a competitive
edge over well-established rivals. These challengers include first wave fintechs, crypto-exchanges and crypto-first banks like SEBA and Wirex. But arguably the group that represents the biggest threat is the tech giants (Facebook, Apple, Google, Amazon), which
are all exploring cryptocurrencies. Facebook may have experienced significant
obstacles with Libra; but the fact that these firms have deep pockets and massive numbers of users, means the tech giants are well placed to play a leading role in cryptocurrency – either through organic developments or targeted acquisitions. And that might
be the Trojan Horse that allows them to grow their presence in financial services more widely.
Combatting the Crypto brain drain…
Amazon, Google and other Silicon Valley enterprises have hoovered up top talent for years. And now it looks like the blockchain-enabled cryptocurrency sector is luring financial, coding and engineering talent
away from legacy firms. Some commentators believe that rising talent has “got bored” with traditional banking’s bureaucracy and is enjoying the novelty of crypto banking. For traditional banks, embracing crypto may be a way of winning back the industry’s
brightest and most disruptive minds.
Even if crypto banking proves to be a short lived phenomenon -
all the signs suggest that it’s here to stay - reversing the brain drain will prove vital if the banking sector is to stage any kind of meaningful fight back against the forces of digital innovation and disruption it seems determined to resist.