Three years ago, digital currencies seemed like a distant future, but now for European banks and financial companies, this future is just around the corner. In recent years, as digital currencies have become more popular, many platforms are now regulated, licensed and fully compatible with the financial services market. So what do banks and fintechs need to do to meet consumer demand for new financial services?
2020 was an important year for digitalisation, as lockdown around the world made many people’s lives go completely online. A new
Speech from the Bank of International Settlements noted that our economy is in the midst of a technological revolution, which means that there are plenty of new opportunities for the banking and fintech sectors.
There are already many companies actively using digital currencies, but now they need appropriate platforms to manage these new financial instruments. While Bitcoin may be the most well-known cryptocurrency, there are many other popular options, including stablecoins, which are digital currencies linked to a fiat money or asset.
In reality, there is no need for banks to integrate blockchain technology or invest millions to reap the benefits of digital currencies, as the majority of banks and financial institutions already have the necessary processes, they just need to be upgraded and brought to a new market.
Let’s take a look at the scope of implementing digital currencies and the methods of using these financial instruments to work effectively with the latest innovations.
Banks as infrastructure
Banks can be used as infrastructure for crypto companies and thereby offer customers direct banking services such as loans, payments and new accounts, which can be a major source of profit for banks and other financial companies.
Another important part of the banking infrastructure is Open Banking. It can also be considered as a separate value stream or profit generation method for banks that use API services for payments, currency exchange and open new accounts. Recently View
announced The launch of its own API system to buy cryptocurrency and integrate it with banks and other financial companies can follow in their footsteps.
Participation in the regulatory sandbox
According to a study Implemented by the Economic, Scientific and Quality of Life Policy Policy Department, the European Commission recently adopted a Digital Economy package, which aims to establish a common EU pilot system to experiment with the use of DLT market infrastructures. That is why banks and fintechs, in order to be competitive, must participate in the regulatory sandbox and offer their services or work to understand technologies and services that can be provided.
We have seen that several neo-banks do not actually have licenses, but thanks to the co-brand products, they can provide services with the intermediaries who have relevant qualifications. This means that operations with digital currencies can also be built on these existing partnerships between banks and fintech companies.
Stablecoins and Central Bank Digital Currency (CBDC)
Of course, working with this type of digital currency involves payments, which means that banks and fintechs must consider integrating these cryptocurrencies into their services in order to make a profit. PayPal CEO, Dan Schulman,
told Coindesk that PayPal’s digital wallets can be used to distribute CBDC to consumers across income levels.
In February, Mastercard announced that together with Island Pay they launched the world’s first CBDC-linked card. This follows Mastercard’s partnership with Wirex and Bitpay, which means that Mastercard will soon start
processing cryptocurrencies in stablecoins, offering customers the most convenient payment methods.
There are many requirements for how money needs to be stored and how repositories need to be built. One of the most successful projects in Europe is
storage of digital assets in the Alps based on a historic old military bunker, which is quite
Popular among crypto holders.
So why should banks not use their financial and physical capacity to ensure the same security for digital currencies as for traditional currencies?
One of the most important stereotypes for cryptocurrencies is that they are an anonymous instrument used exclusively for money laundering. However, there are many crypto platforms that are approved by regulators to help monitor transactions and ensure that customers are not completely anonymous. These requirements are included in the legislation to prevent money laundering and terrorist financing. Service providers such as Elliptic or Chainalytics monitor and track cryptocurrencies and the origin of the payment, which means that anything suspicious can be immediately flagged and blocked. These services have robust risk assessment procedures that enable compliance teams to understand if a transaction is legitimate and the source can be trusted.
The other part of money laundering is the Travel Rule, which has been implemented all over the world. All payment providers (SWIFT, SEPA, faster payments) that work with digital currencies must use certain data for identification when classifying and monitoring transactions. These procedures will be established between all companies operating digital currencies under license, which means that this is another path that banks and fintechs can begin to explore as they extend their services to digital currencies.
Another way that banks and financial companies can use digital currencies is to combine their technology in joint ventures. The best option is to work with relevant companies to change public opinion about the use of cryptocurrency. However, due to the rapid change in digital currencies, there are no ready-made solutions as they may become obsolete when integrated.
Such integrations require an iterative approach with steady improvements that respond to the specific needs of users. The best way to achieve this is to make changes with a partner who already has extensive experience and similar solutions in the portfolio. Such cooperation will enable the fintech sector to develop, help promote new services and improve digitalisation.