Three years ago, digital currencies seemed like a distant future, but now for European banks and financial companies, this future is just around the corner. In recent years, as digital currencies have become more popular, many platforms are now regulated, licensed, and fully compliant with the financial services market. So what do banks and fintechs need to do to meet the consumer demand for new financial services?  

2020 was an important year for digitalisation, as lockdowns around the world meant many people’s life went fully online. A recent speech from the Bank of International Settlements noted that our economy is in the middle of a technological revolution, meaning that there are plenty of new opportunities for the banking and fintech sectors. 

There are already many companies who actively use digital currencies, but now they need the appropriate platforms to deal with these new financial instruments. While Bitcoin may be the most well-known cryptocurrency, there are many other popular options, including stablecoins, which are digital currencies that are pegged to a fiat money or asset.  

In reality, there is no need for banks to integrate blockchain technology or invest millions to reap the rewards of digital currencies, as the majority of banks and financial institutions already have the required processes, they just need to be upgraded and brought to a new market. 

Let’s take a look at the scope of implementing digital currencies and the methods of using these financial instruments to work effectively with recent innovations.   

Banks as infrastructure 

Banks can be used as infrastructure for crypto companies and in doing so, provide customers with direct banking services such as loans, payments and new accounts, which could be a large source of profit for banks and other financial companies.  

Another important part of banking infrastructure is Open Banking. It could also be considered as a separate value stream or method of profit generation for banks, using API-services for payments, currency exchange, and opening new accounts. Recently, Visa announced the release of its own API system for purchasing cryptocurrency and integrating it with banks, and other finance companies could follow in their footsteps.  

Participation in the regulatory sandbox 

According to a study carried out by the Policy Department for Economic, Scientific, and Quality of Life Policies, the European Commission recently adopted a Digital Finance package, which aimed to introduce a common EU pilot regime to experiment with the use of DLT market infrastructures. That’s why banks and fintechs, to be competitive, need to participate in the regulatory sandbox and offer their services or work on understanding technologies and services that could be provided. 

Licenses  

We have seen that several neo-banks don’t actually have licenses, but thanks to the co-brand products, they can provide services using the intermediaries who do hold the relevant permissions. This means that operations with digital currencies could also be built on these existing partnerships between banks and fintech companies.  

Stablecoins and Central Bank Digital Currency (CBDC) 

By nature, working with this type of digital currency involves payments, which means banks and fintechs need to consider integrating these cryptocurrencies into their services in order to make a profit. PayPal’s CEO, Dan Schulman, told Coindesk that PayPal’s digital wallets could be used for CBDC’s distribution to consumers across income levels.  

In February, Mastercard announced that together with Island Pay, they were launching the world’s first CBDC-linked Card. This follows Mastercard’s partnerships with Wirex and Bitpay, meaning Mastercard will soon start processing crypto payments in stablecoins, offering customers the most convenient payment methods.   

Custodian Services 

There are many requirements for how money needs to be stored and how repositories need to be built. One of the successful projects in Europe is the storage of digital assets in the Alps based on a historic ancient military bunker, which is quite popular among crypto holders.   

So why wouldn’t banks use their financial and physical capabilities to ensure the same security for digital currencies as they do for traditional currencies?    

Anti-Money Laundering 

One of the main stereotypes of cryptocurrencies is that they are an anonymous instrument exclusively used for money laundering. However, there are numerous crypto platforms that are approved by regulators which helps to monitor transactions and ensure customers aren’t completely anonymous. These requirements are included in the regulatory legislation to prevent money laundering and terrorist financing. Service providers such as Elliptic or Chainalytics monitor and trace cryptocurrencies and the origin of payments, meaning anything suspicious can immediately be flagged and blocked. These services have robust risk assessment procedures which allows compliance teams to understand whether a transaction is legitimate and the source can be trusted.  

The second part of anti-money laundering is the Travel Rule, which has been implemented worldwide. All payment providers (SWIFT, SEPA, Faster Payments) that work with digital currencies must use certain data for identification when it comes to classifying and monitoring transactions. These procedures will be established between all companies working with digital currencies under the license, meaning that this is another avenue that banks and fintechs can begin to explore when expanding their services to include digital currencies.  

Joint Projects 

Another way banks and financial companies can use digital currencies is by combining their technologies within joint ventures. The best option is to work with relevant companies to help change public opinion around the use of cryptocurrency. However, due to the fast-changing nature of digital currencies, there are no ready-made solutions, since they could be obsolete by the the time they are integrated.  

Such integrations require an iterative approach of steady improvements, which will respond to the specific needs of users. The best way to achieve this is to make changes with a partner who already has extensive experience and similar solutions in the portfolio. Such cooperation will allow the fintech sector to develop, help promote new services and make improvements towards digitalisation.