By Simon McLoughlin, CEO, Uphold
One of the clearest advantages enjoyed by a small community bank is its inherent array of connections spanning a close-knit circle of friends, neighbors and local leaders.
You know them by their high school nicknames, watched their children grow up, and then just like that – in what seems like the blink of an eye – the little tykes have taken over the family business.
Fast forward and these kids aren't coming by the branch to check on their account; no, they're clicking on an app; and perhaps transferring digital money into or out of a digital wallet on their phones; maybe they're seeking out the best yields from a lineup of on-chain staking vehicles and very likely with help from an AI Agent; or possibly a business-related hedged bet by way of the predictions markets. Any of this ring familiar?
It will, and sooner than you think.
The next generation of consumers is growing up with computer games, apps, reward mechanisms and expectations no traditional bank can offer. Digital natives expect instant, borderless, programmable finance with high levels of AI automation.
Ready or not, here comes the future. Tomorrow has arrived in the form of a rapidly transformative blockchain infrastructure underpinning the rise of digital money – its movement, activities, settlement and safekeeping – across asset classes and key business lines, globally. Lines are blurring and all the traditional fee channels are morphing. The time to prepare for this disruption is literally right now.
If not, you risk losing the next generation of customers to a Robinhood, Revolut or Coinbase.
"This sweeping on-chain shift in banking isn't the kind of issue that gets resolved by delegating it into a backlog of new product innovations in the drawing board stage," one banker recently conceded.
"It's a top-down strategic priority."
How Offerings Are Changing & Why Now
A confluence of factors – such as the growth of dollar-pegged stablecoins, abetted by new laws governing their issuance in lockstep with the emergence of digital-money-friendly platforms such as Robinhood and, obviously, Coinbase – have led to a moment in time where bank executives now confront the question of whether the phrase "bank account" is still going to hold any sway with tomorrow's clients. This is a demographic trained by big tech for seamless experiences. They will expect money to move like text messages.
The crypto speculation phase is over. Now the "on-chain" phase has begun for traditional finance.
What opened this seemingly nerdy and bizarre realm to traditional banks is the dawn of stablecoins, with the two biggest being Tether's USDT and Circle's USDC, built to remain on par with the greenback.
These assets are backed by billions of reserves, cash and cash equivalents. Stablecoin deposits and the ecosystem of short-term instruments backing them natively on-chain stand out as being among several trillion-dollar-plus servicing opportunities looking ahead to the next five years.
High-profile squabbles between Coinbase's CEO Brian Armstrong and JPMorgan chief Jamie Dimon about stablecoin rewards shouldn't obscure the blatant trend that is fast enveloping every corner of Wall Street down to its core settlement layers with support from the largest institutions, JP Morgan included.
The future of the broad-based financial system, and by extension some of your most critical business lines, will rest on a few key components – one of them, as mentioned, is regulated stablecoins. And while you figure out how to on-board and interact with these digital dollars, rest assured the payments giants (Stripe and Paypal) will have already long pivoted into stablecoins and related services (together under one roof if their announced merger goes through).
Another pillar supporting the new causeways of finance are tokenized deposits that will lead to digital money becoming embedded into a bank's entire workflow hierarchy, impacting FX, cross-border payments, liquidity/collateral, securities services and, at some point in the not-too-distant future, most client-relevant interactions.
A tokenised US Deposit is simply a dollar on a blockchain. Put another way. It's simply a dollar issued by a US bank. But it combines the convenience of a stablecoin with the protections and benefits of the US banking system.
And it's the key to attracting a brand-new generation of digital native customers. The 'lost' generation to U.S. banks.
In a recent industry survey of a cohort of 18-to-34-year-olds, some 47% indicated owning digital assets; and of that group, nearly two-thirds indicated that they would be keen to buy digital assets through primary banks if such an offering were available.
Checking on a subset of data capturing "millennials that have checking accounts," a full one-fifth of them use digital assets, most often relying on Robinhood and Coinbase. These platform giants might seem unstoppable but research shows a majority of Americans distrust them in part because of the negative headlines from the collapse of FTX in 2022.
It's been estimated that 70% of users would prefer to obtain digital markets exposure through a trusted, compliance-centric local bank or credit union.
History is filled with examples of rapid changes overcoming stubborn competitors paralyzed by inertia. Horse-drawn wagons usurped by canals outpaced by railroads overtaken by diesel trucks, to follow the tracks of freight transportation over a century or two. Early railroad sagas are filled with tales of compatibility conundrums and comical inefficiencies because individual operators insisted on running their own lines of track built their way until finally a centralized system took hold – built atop pathways that originated with roads cut by covered wagons.
We need only go back to 2010 to find a crossroad moment for banks. It came in the form of an invention called the iPhone and a push into applications that took everything from in person to online. The first movers into the digital banking era – in that first stretch of 12 to 18 months – would end up enjoying outsized advantages. Those who dawdled paid a price and required several years to catch up.
These children that you disregard as they try to change their world, to paraphrase David Bowie, are not, as it turns out, immune to your consultation. Studies show that they're ready to partner with a trusted, accountable entity. From our perspective as a vendor focused on on-chain infrastructure banks and credit unions need to do the same. We're quite aware of what you're going through.
