Each day there are new headlines about cryptocurrency that concern many of us in the regulated financial sectors. From its volatility - both high and low - to lack of oversight, to conversations around decentralized finance, much of the larger narrative around cryptocurrencies seems like a far reach from the financial services space we’ve come to know. In the past 6 months alone, Bitcoin volatility reached a 14-month high, investors spent millions on NFTs only to be scammed and most recently, the Squid Game crypto “Squid” collapsed 11 days after launching.
While much of the chatter that occurs is tied to what’s taking place outside of the regulated space, one conversation that is getting lost is about the power that blockchain technology could play in the regulated financial industry - specifically in banking. Smaller commercial banks, like ours to the largest financial institutions in the country, are exploring the various ways that blockchain can be brought into the fold of banks.
Blockchains are best known for their role in cryptocurrency systems and storing information electronically in a digital format, and while some use cases do include a token, their functionality can be applied far beyond crypto.
A few examples of how banks could adopt blockchain in the year ahead are:
Using blockchain for payments and transactions is probably one of the most obvious ways for banks to adopt the technology. Utilizing Stablecoin, a cryptocurrency that is reflective of the value of a designated fiat currency, banks have found ways to not only speed up but send and receive payments outside of the Federal Reserve’s “banking hours,” all while driving down the cost of payments. International payments, in particular, are fairly costly for both smaller banks and their clients and blockchain-based payment solutions can create immediate wins for both banks and their clients.
The ability to couple payments with smart contracts allows banks to connect multiple data points, follow pre-set conditions or utilize data to navigate transactions that require interdependencies. This creates an avenue for banks to manage complex transactions in a much more streamlined and secure way. From loan closing workflows, to invoicing, to supply chain financing, there are countless opportunities to apply the power of blockchain for better, more secure transactions.
Beyond payments, blockchain provides banks the opportunity to streamline complex workflows and optimize internal processes. Much of the inner workings of banks are still built on siloed systems, often resulting in manual processes. Blockchain technology can enhance the connection between different critical infrastructures and eliminate the manual process in which large amounts of data are exchanged.
As banks work hard to build use cases and prepare their organizations for blockchain, regulators are working equally hard to provide guidance and standards. In fact, bank regulators recently issued a joint statement sharing an update on their roadmap to develop guidance around specific bank activities involving crypto. While the rhetoric of many in the cryptocurrency space challenges the power of a central banking system, it’s important to remember that the regulations that commercial banks follow are in place to protect consumers and maintain the strength of the American economy.
A recent report on Stablecoins from the three main regulatory bodies (President’s Working Group on Financial Markets, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency), is the first form of guidance banks have seen and a glimpse of how they will be able to utilize the technology.
Further supporting the power of blockchain, the report highlights that Stablecoins ‘if well-designed and appropriately regulated’ could support faster, more efficient, and more inclusive payment options. It also touches on the potential risks, providing banks with a deeper understanding of what they need to prepare for. In many cases, there is room for banks to mint their own coin, making way for a new wave of cryptocurrency.
As momentum continues to increase, banks are building use cases and exploring ways their operations can be streamlined through the use of blockchain so their audiences can be better served. Bank regulators continue to remain engaged on the topic and talks of a Central Bank coin will only bolster initiatives across the industry. And while we’ve learned quite a bit from the cryptocurrencies that have gained popularity, let’s not lose sight of the opportunity to transform what we do every day. Ultimately, the future of blockchain banking has not quite taken shape, but there’s never been a more exciting time to build the blueprint.