Editor's note: this is a guest post from venture investor and banker Alan Vaksman, who argues that European banks "slept through" the mobile revolution of the mid-2000s, and if they do not wake up, they will be late boarding the "digital currencies" train to boot. He is confident that in order for banks to quickly catch up and regain the lead they’ve lost by ignoring crypto to date, buying a crypto-fintech is the best solution.
The global digital asset market continues its march towards maturity, becoming more transparent and properly regulated.
This can be seen most recently with the EU Commission’s plans to introduce a crypto-assets “regime” by 2024, with the head of the ECB Christine Lagarde also discussing the introduction of a digital euro. To further cement crypto’s place in the world, crypto industry leaders have been actively seeking the safe harbor of legitimacy, and successes are being achieved.
Examples include the US-based crypto trading platform Kraken already officially becoming a bank, Coinbase planning an exciting IPO, and Binance continuing its search for opportunities to acquire a bank.
Users are also seeing growing interest in digital assets. Consumers diversify their assets by adding crypto to their portfolios to hedge against inflation heightened by financial fiat stimulus that governments across the world have injected into their economies in response to COVID-19 led economic downturns.
So, it’s no surprise to see Arcane Research reporting investor interest in cryptocurrency this summer rising to its highest values since January 2018. Crypto startups enormously profit from this, while Traditional finance and fintechs have relied on the commission model, but this opportunity is shrinking as commissions are being reduced. However, in the crypto world commissions are still being widely earned, with Binance making a profit of $183.5m in the third quarter of 2019 alone while neobanks have multiplied their losses.
Hello financial leaders - this is your wake up call!
It certainly hasn’t been rosy for crypto over the last decade-plus with the reputation of cryptocurrencies suffering greatly in 2017-2018 , leading to crypto being outlawed in many countries. However, fast forward to October 2020, things have turned around in most jurisdictions worldwide, changing things for the better.
The Fifth AMLD against money laundering has entered into force in the EU and the UK this year, obliging crypto services to identify users during transactions bringing crypto into line with banks and fintechs. More recently, crypto companies have also automated the transmission of information about the performed operation in accordance with the KYT (Know Your Transaction) methodology, further streamlining processes.
What many banks are missing out on in the realization that the global financial market has already become multipolar. If traditional banks allowed their clients to invest in digital assets, we would see a significant increase in the number of crypto wallet holders. For most of those interested in this type of investment, working with “hard to understand” crypto projects is still a limiting factor. But this won't remain the case for long. The mass investor will come to crypto, and this transition is already happening. The solution for banks to profit from this wave should be simple: upgrading their infrastructure and payment platforms to work with both digital and fiat technologies. However, if it’s so simple, why haven’t they done it yet?
Banks need to acquire crypto-fintech expertise - and fast
The problem is that traditional banks aren’t skilled with crypto products, and to build this capability natively inside the bank could take two to three years.Even the best IT banking teams just aren’t geared towards interacting with a decentralized information system. Then there’s the issue of clumsy banking compliance and outdated IT infrastructure. At venture builder Digital Horizon, we were able to build Aximetria, a crypto service powered by a Swiss license, in a year and a half.
With interest in crypto rising rapidly and banks finally getting on board, banks need to find a way to avoid the year and a half learning curve and get on board to take advantage of the incredible crypto opportunity.
Crypto leadership claims - who to believe?
Banks are no longer the only ones that can operate in the world of finance, with Big Tech becoming significantly more active in the financial world. Technology players like PayPal, Facebook, Telegram were also interested in making their moves into the world of finance and fast. The most recent example is Russia's largest search engine Yandex having announced the acquisition of Tinkoff bank.
Tech companies are moving fast: they have similar DNA to crypto startups where they can significantly outperform banks. Under the pressure of such competition, banks are essentially left with only one option: to partner with or buy startups together with their experienced development teams, so they can leapfrog the tedious learning process and truly hit the ground running.
In the coming year, we will see how banks will start acquiring interesting crypto projects and integrate them into their own products. Banks have a golden opportunity to enter the world of digital currencies, while regulators have cleared the way by clipping the wings of ambitious social media founders.
However, if traditional players hesitate, the niche will quickly fill with other companies, and the dominance of traditional banks will truly face a crushing crypto disruption. Move with the times or become yesterday’s news: the crypto revolution is one you can bank on.
Featured image credit: Kai Pilger / Pixabay