Cryptocurrencies such as Bitcoin and Ethereum are increasingly viewed as a tantalising proposition by investors, especially in this era of COVID-19 inspired low interest rates. However, incumbent banks have so far been reluctant to engage with the fast-growing crypto market because of the sector’s less reputable elements: with their wild fluctuations in value and accusations of harbouring criminal activity, piling into the crypto economy can resemble cavorting at a prohibition era casino. For legacy banks, it equates to a heightened level of risk – at a time when the financial services sector is expected to present itself as steady and stable. 

Yet for all these concerns, the fact remains that the blockchain-powered crypto economy is growing fast. Yes, there are concerns about pockets of badlands-style behaviour – but increasingly these are outweighed by the rich array of innovations delivered by crypto pioneers. Whether you look at efficiency, privacy, security, customer access to banking or modes of transaction, digital money is poised to transform the entire financial services ecosystem.

The recognition of crypto’s potential could well be the motivation behind a landmark declaration by the OCC (Office of the Comptroller of the Currency) – a division of the US Treasury in Washington DC. In an open letter, the OCC permitted US banks to custody crypto assets for customers and provide banking services to crypto businesses.

The OCC’s unexpected intervention in the crypto debate - no doubt influenced by having former Coinbase exec Brian Brooks as its COO -  is a clear sign that powerbrokers in the US economy are positioning themselves to embrace digital currency as complementary to fiat currency. It coincides with reports that the Federal Reserve is working with MIT on the creation of a digital dollar codebase. 

Those banks with a vested interest in the future of the financial services ecosystem (or serious ambitions towards the sector) need to prioritise developing a rigorous crypto strategy. And they need to begin by looking at three areas:

1. Study CX lessons from first wave fintechs

Whether in B2C, B2B or enterprise, customers now expect high quality CX when they consume financial services. Big banks were founded on serving their communities and delivering against their needs. In many respects they have fallen behind fintechs when it comes to setting the gold standard for best practices in customer experience, too often emphasising siloed products over customer needs. This, along with growing in parallel with the communities they were built to serve, is what has enabled the likes of Monzo, Revolut and OakNorth to establish their position in the market. Crypto is still at the start of its banking journey, but some of Crypto-first neo-banks like SEBA are aiming to emulate fintech best practices by starting from customer needs. Banks can establish a competitive advantage by presenting a better customer experience alone.

2. Adopt a laser like approach to target markets

In a competitive and increasingly crowded ecosystem, aspiring crypto business models will need to focus on underserved niche customer groups to stand out from their rivals. This reflects the situation among successful fintechs, which have thrived by targeting specific customer niches rather than delivering a one-size-fits-all mass market offering. One area where there may be scope for growth is in offering banking services to smaller players in the crypto sector - such as smaller exchanges or companies innovating with crypto applications in the payments and wallet spaces. 

As a segment, SMEs have historically been neglected by banking solutions, paying high rates for transfers and loans. This has now changed, with SME banks popping up left and right. However, for crypto businesses it’s as difficult as ever.  This means there may be opportunities to build banking propositions for crypto SMEs. Another emerging customer segment is the growing band of cryptocurrency day traders. Tempted in by the promise of speculating on huge upsides on Bitcoin and similar currencies, there is a dearth of robo advisory options, or banks with relevant products. As such they represent a potential opportunity for forward-looking banks with domain expertise in investment products for individuals. 

3. Be primed for (more) regulatory easing

The OCC’s interpretive letter is not an isolated example of regulatory activity around cryptocurrency. Indeed, this is one of those rare occasions where regulators are ahead of the curve – taking a bolder stance than financial services incumbents. The UK, Germany, Japan, Singapore, Malaysia and India have all made moves in recent months – approving exchanges, piloting digital currencies, drafting rules and providing guidance to interested parties. The message for banks keen to take the lead in crypto is that they must be agile and flexible enough to respond to sudden adjustments in domestic regulatory regimes (including the potential for regulatory pushback against crypto and international co-operation between financial regulators). Hiring talent that can keep pace with crypto regulation will prove a shrewd investment.

Every new phase of digital disruption creates fundamental challenges and opportunities for both incumbent and emerging companies. To successfully navigate the emerging world of cryptocurrencies, banks will need to identify clear market objectives and place customer-centricity at the heart of their proposition or risk being outflanked by faster, more agile competition. And as the OCC letter illustrates, they will also need to keep their fingers firmly on the pulse of a complex and fast-moving international regulatory landscape.