In brief
- Consumers, businesses and regulators are embracing digital currencies and decentralized finance solutions, causing urgency for financial institutions to adapt.
- Many traditional financial institutions have yet to prioritize digital assets, putting them at a disadvantage in an evolving competitive landscape.
- Taking a future-back approach to strategy building can help financial institutions leverage existing strengths to compete in the digital asset market.
Digital assets have evolved rapidly over the past decade, gaining momentum through a proliferation of new use cases. As their popularity grows, cryptocurrencies, non-fungible tokens (NFTs) and DeFi could disrupt TradFi business models. They also offer promising growth opportunities for those that can adapt to new ways of doing business.
This is a game TradFis can win. For example, one recent study found that 81% of bitcoin holders would move those holdings to a bank if it had secure storage.¹ It’s also one they could lose: a major thrust of DeFi is to use decentralized ledgers to disintermediate TradFis by reducing the need for financial third parties.
Despite the stakes, few institutions have clearly defined digital asset strategies. Many believe that there are too many impediments for digital assets to become widely embraced and are content to wait things out.
FIs that continue to wait for interest in digital assets to wane risk falling further behind. The market capitalization of cryptocurrencies, such as bitcoin, topped $3 trillion in the fourth quarter of 2021,² and DeFi solutions providers are among the FinTech world’s hottest sectors. El Salvador garnered headlines in September as the first country to make bitcoin legal tender,³ while about 80% of central banks are exploring issuing their own digital currencies.⁴
This momentum is a call to action. To succeed in this changing environment, institutions can first debunk the beliefs that have kept them from prioritizing digital assets and then leverage future-back methodologies to identify strategies that give them the best chance to compete.
The beliefs that inhibit TradFis from prioritizing digital assets:
| Belief | Reality |
| Regulators will halt innovation in digital assets before they are embraced by the industry | The U.S. Securities and Exchange Commission,⁵ Federal Reserve,⁶ Commodity Futures Trading Commission and IRS are already adopting frameworks and guidance for digital assets. Regulatory scrutiny is likely to generate greater trust and interest. |
| Digital assets might be coming, but there is time to learn the technology and prevent disruption | Innovation is occurring at a rapid clip, with crypto- and blockchain-related startups alone attracting more than $15 billion during the first three quarters of 2021 — up 384% from all of 2020.⁷ The longer TradFis wait, the larger the talent and capability gap they will need to overcome. |
| Existing infrastructures run by the government and industry will preserve TradFi business models | The infrastructure is already changing. A growing number of countries are adopting digital payments and lending practices. Roughly 20% of central banks expect to issue their own digital currencies by 2026.⁸ |
| Mass adoption of digital assets by consumers and businesses will be a lengthy process | Mass adoption is already happening. More than 20% of investors have digital currencies in their portfolios.⁹ A recent survey found that 36% of small and midsized businesses accept cryptocurrency and 59% have used it.¹⁰ Partnerships, such as those between GoCrypto and Binance¹¹ or Mastercard and Bakkt,¹² are likely to boost usage even further. |
| Digital asset firms are small and lack maturity | A flood of investment capital has allowed the digital asset ecosystem to scale rapidly. For example, the Ethereum network soon will be able to process 15,000 transactions per second,¹³ matching the speed of any central bank processing system, while regulators, central banks and larger TradFis are positioning themselves for the long term, lending their credibility. |
| DeFi firms pose a threat to TradFis | DeFi firms can be staunch competitors to incumbent FIs, but also potential partners. Forward-thinking TradFis are looking for opportunities to leverage digital asset capabilities and partner with DeFi firms, while digital asset natives are eager to leverage TradFis’ core competencies and customer bases. For example, Visa has partnerships with more than 50 crypto firms,¹⁴ while NYDIG, an investment services firm, continues to partner with large banks. |
How TradFis can drive growth by embracing digital assets
Some TradFis have internally debunked these beliefs and begun to craft digital asset strategies that leverage existing strengths and position their businesses for growth. Examples of how early movers are approaching the market include:
1. Being a digital asset custodian
Bank of New York Mellon (BNYM) is creating a multi-asset and digital custody platform for the transfer, safekeeping and issuance of digital assets.¹⁵ Custody is a core business for BNYM, and as digital assets become more widely held, customers are demanding custody solutions, making it a natural fit.
2. Enabling crypto purchases
PayPal has partnered with Paxos to allow its customers to buy, hold and sell bitcoin, Ethereum and other cryptocurrencies through their digital wallets.¹⁶ The relationship promises to raise the profile of cryptocurrencies and accelerate adoption.
3. Facilitating crypto investments
Wells Fargo is among several banks offering bitcoin investments through a partnership with NYDIG.¹⁷ The bank receives placement and servicing fees for referrals to NYDIG.
4. Processing payments
JPMorgan Chase recently announced that it will team with Singapore’s DBS Group and Temasek to form a blockchain payments platform in a bid to ease cross-border payments, trade and currency settlements.¹⁸ The newly established technology company, Partior, will leverage blockchain technology and digitize M1 commercial money. The platform will develop wholesale payment rails based on digitized commercial bank money to enable “atomic” or instantaneous settlement for various kinds of financial transactions.
5. Offering crypto rewards
Mastercard has partnered with Gemini, a cryptocurrency platform, on a credit card that offers real-time crypto rewards on purchases made with bitcoin or other cryptocurrencies.¹⁹ Customers can benefit from any appreciation in the value of their currency holdings.
6. Reimagining trade finance
Commerzbank, Isbank and LBBW became the first banks to execute a commercial cross-border transaction via Marco Polo, a distributed ledger technology-enabled trade finance network.²⁰ The partnership leverages DeFi technology to enhance the efficiency and security of supply chain management and trade financing solutions.
A future-back approach to jump-start digital asset strategies
TradFis that have found success in the digital asset space have embraced systematic, future-back approaches to strategy building centered on four key actions:
Learn the marketplace
Developing a comprehensive understanding of the digital asset ecosystem’s technologies, financial treatments, risks and regulatory environment can spark new thinking and inform strategic discussions.
Envision the future
Hypothesizing a five-year vision that leverages data to answer key strategic questions, such as how best to leverage existing capabilities or which customer segments to target, can help TradFis create superior value propositions. Forging a compelling vision can energize the organization and inspire internal momentum for change.
Validate and iterate hypotheses
Testing the validity of hypotheses through expert interviews and data-driven scenario analyses can help FIs understand how strategies align with existing customer bases and impact operations. A thorough evaluation can give leaders the confidence to pursue the right approach.
Create a strategic road map
Tracing various pathways from the present state to a targeted digital asset strategy can guide the implementation. Evaluating and comparing costs, ease of execution, talent needs and funding requirements for different journeys can help FIs identify and pursue strategies capable of producing a competitive edge.
References
¹ NYDIG Survey: Banking + Bitcoin, January 2021, NYDIG website,
² “The World’s Cryptocurrency Is Now Worth More Than $3 Trillion,” Time, November 8, 2021.
³ “In Global First, El Salvador Adopts Bitcoin as Currency,” The New York Times, September 7, 2021.
⁴ “About 80% of Central Banks Are Exploring CBDC Use Cases, Bison Trails Report Says,” CoinDesk, May 19, 2021.
⁵ “Framework for ‘Investment Contract’ analysis of digital assets,” U.S. Securities and Exchange Commission website,
⁶ “Stablecoins in Spotlight as U.S. Begins to Lay Ground for Rules on Cryptocurrencies,” The Wall Street Journal website,
⁷ “State Of Blockchain Q3’21 Report,” CB Insights website, accessed December 2021.
⁸ “Rise of the central bank digital currencies: drivers, approaches and technologies,” BIS Working Papers No 880, Bank for International Settlements, August 2020,
⁹ NYDIG Survey: Financial Advisors + Bitcoin, March 2020, NYDIG website,
¹⁰ “HBS Survey Finds One-Third of Small Businesses Accept Cryptocurrency,” BusinessWire website,
¹¹ “How GoCrypto-Binance Pay Alliance Could Boost Crypto’s Mass Adoption,” BeInCrypto website,
¹² “Mastercard and Bakkt partner to offer innovative crypto and loyalty solutions,” Mastercard website,
¹³ “Six Reasons Why Ethereum Has Intrinsic Value,” CME Group, Reuters website,
¹⁴ “Visa’s Active Crypto Partnerships Reaches 50 Firms,” Tokenhell website, accessed December 2021.
¹⁵ “BNY Mellon Forms New Digital Assets Unit to Build Industry’s First Multi-Asset Digital Platform,” BNY Mellon website,
¹⁶ “PayPal & Paxos Bring Crypto to Millions of Users,” Paxos website,
¹⁷ “NYDIG and Wells Fargo partner to launch bitcoin funds,” Techstory website,
¹⁸ JPMorgan teams with Singapore's DBS and Temasek to form a blockchain payment platform, Business Insider, April 2021 JPMorgan teams with Singapore's DBS and Temasek to form a blockchain payment platform | Currency News | Financial and Business News | Markets Insider (businessinsider.com)
¹⁹ “Gemini partners with Mastercard to launch new crypto rewards credit card this summer,” Mastercard website,
²⁰ “Commerzbank and partners execute live transactions on the Marco Polo trade finance network,” Marco Polo Network website,
Summary
As digital assets continue to gain momentum, financial institutions that can overcome outdated beliefs and leverage future-back approaches to prioritize digital asset strategies will be positioned for growth.
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