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Why Banks Haven’t Jumped Full Throttle Into Crypto Yet? Will Crypto And Banks Ever Marry?

One could argue that since crypto inherently brings with it a lot of volatility while challenging the fiat status quo, each bank probably held back to see what the others would do or what central banks and regulators would impose . In the banking world, accepting a technological or financial innovation and going down this path has always been risky. Unless you are a global bank and a game changer in the market and have the power to make your mark, you would probably wait and see what others are doing and follow the trend. On the other hand, if you are that elephant in the room, then you would also take careful steps to coordinate with regulators and central banks, and then strategically plan your move to embrace the innovation through carefully executed business cases. So, until now, banks have largely just formed syndicates and toyed with the concept of crypto and DLT to try it out first.

The Saga of Crypto and the Rise of Stablecoins –

Largely due to its high volatility, crypto’s development has been bumpy at times since its inception – well, at least two major bumps – first around 2013-2014 (hack of popular crypto exchange) and second around 2017-2018 (bitcoin, ether, etc. crash from the summit). Crypto’s limitations made the business case for stablecoins (cryptocurrencies pegged to fiat currencies like USD, GBP etc. or commodities like gold) stronger. With the advent of stablecoins, people started looking at crypto as a form of payment rather than just an investment.

The power of stablecoins –

Stablecoins have recently gained momentum for instant settlement, facilitating 24/7 liquidity, especially for the traders who have typically waited days for their settlement accounts to be replenished. Additionally, recent innovations surrounding touches of open banking, enabling crypto transactions from multiple accounts, automated sweeping across merchant checking accounts and settlement accounts, aggregated bill payment and reconciliation using stablecoins, and instant crypto settlement, etc. have gained momentum won. And then there are those that resemble sci-fi, but possible scenarios where smart cars interacting with each other via IoT settle into stablecoin via DeFi (decentralized finance) to have right-of-way on a busy road.

How are regulators responding to these innovations?

Recently, even the stablecoin has seen its own bumps as certain algorithmic stablecoins imploded around the second quarter of 2022 ($45 billion market cap wiped out in a week!). Since the footprint of crypto and stablecoins wasn’t that big yet, as banks around the world haven’t delved into crypto, the risk to global market infrastructures wasn’t that high. But now, as stablecoin-based arrangements gain more systematic traction, regulators like the BIS’s Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are scrutinizing them and recently issued guidelines for clearing payments published and settlement standards even for stablecoins.

What does the future hold for crypto in the context of banks?

Even after the recent turmoil in the stablecoin world, it shows promise due to the decentralized design that can support numerous advanced use cases. Regulated cryptography coupled with emerging concepts and innovations is destined to eventually capture more and more market share. Multiple opportunities within the metaverse or numerous use cases in an open banking environment or even innovation using DeFi in the cross-border trading space are inevitable. With the BIS push for CBDC, crypto will be a key means of transaction for banks and PSPs (payment service providers) for years to come, at least for CPMI countries.

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