arthur d little
Cryptocurrency Europe Thought Leadership

Arthur D. Little: Banking on Cryptocurrencies – Riding the Wave of Uncertainty

Cryptocurrencies have had a tough year. From major hacks, to going bankrupt – crypto faith has waivered. As a result, banks and fintechs have tread lightly when entering the world of digital currencies. Some have even avoided it all together.

That’s not to say they should be avoiding it though. In fact, according to Georg von Pfoestl, head of financial services Austria at Arthur D. Little, organisations should be keeping an even closer eye on the crypto market. Specialising in helping organisations venture into new ecosystems to grow, Arthur D. Little enables its clients to build innovation capabilities and transform their organisations.

Having worked in the fintech industry for 17 years, von Pfoestl has seen crypto attitudes change before his eyes. Speaking to The Fintech Times, he explained why businesses should be riding the wave of uncertainty and remain optimistic about the future of crypto – despite its unpredictability:

Georg von Pfoestl, head of financial services Austria at Arthur D. Little
Georg von Pfoestl, head of financial services Austria at Arthur D. Little

Cryptocurrencies provide a major dilemma to banks and fintechs. On the one hand crypto is seeing a significant and swift market downturn, exacerbated by the recent failure of the FTX exchange. Yet, in parallel these currencies are being taken more seriously than ever before by mainstream financial institutions (and regulators). So, what should the next steps be for fintechs and banks? Does the potential long-term reward outweigh short-term volatility?

Everyone in the banking industry understands the potential advantages of crypto. By creating a peer-to-peer version of electronic cash where payments don’t have to pass through intermediaries, crypto has the potential to remove friction, high costs, and bias from the system. This helps the financially marginalised and brings in new mechanisms to create transparency and trust through the blockchain. No wonder start-ups and fintechs had launched an estimated 19,000 cryptocurrencies by June 2022.

Can the crypto Wild West be tamed?

Crypto has always been volatile. What has changed is that it is increasingly moving towards the mainstream as it grows. Regulators fret about its wider potential impact. They’re mindful that the market is bigger than the subprime mortgage market was when in it triggered the global financial crisis of 2007-2008. Typifying these worries, Fabio Panetta of the European Central Bank categorised crypto as a “Wild West” investment, describing market activity as a “digital gold rush beyond state control.”

All of this is leading to increased regulatory activity, with some countries (including China, Indonesia, and Turkey) banning crypto transactions outright. In many others regulators are looking to tame the wilder excesses of crypto firms through tighter rules. What is unclear is the level of regulation that will be applied. Whether it will provide banks and established fintechs with sufficient confidence to move forward in the crypto market.

So, will crypto be a safer bet in five years? Probably. But as with much else with digital assets, it is much easier to ask questions about them than to answer them. To paraphrase one-time US Defense Secretary Donald Rumsfeld, the world of crypto is too filled with “things we don’t know we don’t know”

How should banks and fintechs adapt?

So how should financial institutions position themselves in this new environment where crypto is increasingly legitimate, and in what areas should a bank or fintech choose to play? That is very much down to the individual institution, its appetite for risk, and its specific take on the market’s point of arrival. Options include:

  • Avoiding the market altogether, avoiding risk but cutting off potential future opportunities
  • Adopting a wait and see approach, which could mean having to play catch-up in a fast-moving marketplace.
  • Alternatively, financial players could dip test the waters by providing a limited range of crypto services, enabling their customers to participate in the market without actively engaging themselves. However, this still opens up risks around security and regulatory action.
The opportunities within crypto for mainstream financial institutions

More and more banks are beginning to expand their portfolio of services to include crypto custody services (with players including US Bancorp, Bank of New York Mellon, Deutsche Bank, BNP Paribas, JPMorgan Chase, and HSBC), crypto-asset trading, crypto lending and wealth management services that encompass crypto assets.

Goldman Sachs was one of the first major US banks to offer OTC trades. Meanwhile, Citigroup is looking to offer Bitcoin futures trading for some institutional clients, dependent on regulatory approval.

French fintech Lydia has partnered with Austrian investment start-up Bitpanda so that its 5.5 million users can now invest in cryptocurrencies. London-based Revolut is looking to set up an in-house crypto-exchange platform and launch its own token. Morgan Stanley, Wells Fargo & Co, and Goldman Sachs are just a few of those operating in the wealth management space.

All of this will require banks and fintechs to revise their operating models to meet regulatory requirements, specifically around liquidity, anti-money laundering and Know Your Customer capabilities. Critical changes will be needed to core banking software, where additional applications will be required for functions such as digital custody and tokenisation.

What does the future hold for crypto?

We may be currently in a crypto winter, but that’s not stopping investment, innovation, or greater regulation. VCs invested $17.5billion in digital currency and blockchain firms in H1 2022. This means the total for the year is likely to exceed 2021’s $26.5billion. Cryptocurrency applications and blockchain technology is an increasing source of interest for financial services firms, with some estimates that blockchain adoption could remove 30 per cent of an investment bank’s infrastructure costs.

The industry is also addressing concerns about the environmental impact of mining bitcoins, particularly in the context of higher energy prices.

For example, in 2022 the Ethereum blockchain switched from mining through proof of work to proof of stake, dramatically reducing its carbon footprint while speeding up transactions. Potential regulation is looming, which may well have a detrimental effect on many existing players – yet at the same time open the market to make it a less volatile space that banks and fintechs can play in.

All of this means that it is certainly an interesting time for cryptocurrencies. On the one hand, they are going through a period of swift and significant falling prices. In parallel they are being taken more seriously than they ever have been by mainstream financial institutions.

“The unknown unknowns”

So, will crypto be a safer bet in five years? Probably. But as with much else with digital assets, it is much easier to ask questions about them than to answer them. To paraphrase one-time US Defense Secretary Donald Rumsfeld, the world of crypto is too filled with “things we don’t know we don’t know” — the “unknown unknowns” — to predict the future with any kind of confidence.

All of this means that if banks and fintechs are to become players in a game that, despite its frequent setbacks, seems to be on an upward trajectory, then they need to decide where they are going to play and what degree of risk they are willing to accept all along the crypto value chain. However, with the market currently so volatile, deciding which risks are acceptable will not be an easy question to answer. It will require deep understanding and monitoring, allied to building new capabilities across the organisation.


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