Cryptocurrencies are at an inflection point; who will step up to create the secure, regulated financial services infrastructure of the future?

Jason Blick, CEO, EQIBank

 

We are at a critical inflection point in the history of cryptocurrencies. Whilst these digital assets have long been marginalised by the world of traditional finance, recent developments show that the tide is about to turn.

 

Christine Lagarde, MD of the IMF is calling for Governments to offer their own cryptocurrencies, praising them for being safe, cheap, and potentially semi-anonymous’. She also heralded digital currencies and blockchain as a platform for innovation in the financial services industry. The IMF is not alone when it comes to traditional financial institutions exploring the potential of cryptocurrencies.  Bank of America is being granted a patent for a crypto storage system and let’s not forget that Intercontinental Exchange Inc (ICE.N), the owner of the New York Stock Exchange, earlier this year announced plans to form a trading platform for digital assets such as bitcoin.

 

It’s clear that the traditional financial services ecosystem is starting to embrace cryptocurrencies (and the underlying blockchain technology) and are making investments to capitalise on the opportunity. This means that 2019 will mark a critical year where the foundations for a crypto-fiat market will be established. However, there are a number of key factors that will determine whether banking is truly evolving to recognise these game-changing technologies.

 

Accessibility

The inability to bank cryptocurrency is the major challenge facing investors and crypto exchanges around the globe. Many FTSE 500 businesses have shown that they want to engage with digital currencies in the coming year, but the traditional financial ecosystem makes it far too costly and risky. Investors are hindered by the complexity of multiple, separate relationships with banks,  exchanges, lenders, custodians, wallet and vault providers.  This typically involves up to 13 different touchpoints, creating an inherently complex process.

 

To start resolving this issue, 2018 saw the launch of a new breed of banks allowing people to hold all their national currency and crypto assets within a single regulated and licensed bank. These banks are bringing the legitimacy of traditional financial services to the crypto space as well as making crypto-fiat banking accessible at a global level.

 

Security and compliance

Cryptocurrencies have long been tainted with the perception that they enable fraud, money laundering and other criminal activity. Investment also has a reputation for being risky, which is hardly a surprise given that over US$1.8 billion of cryptocurrency assets have been stolen since 2014, and many major exchanges hacked.

 

However, it’s worth noting that crypto and blockchain are nascent technologies. Many digital services are similarly used as forces both positive and negative in their early phases of adoption. In the crypto works this is changing with new players and traditional financial institutions bringing safety, security and legitimacy to the sector.

 

Key to this is a new breed of banks that are making AML & KYC compliance core to the crypto narrative rather than an afterthought. We have also seen the launch of the first insured wallets for cryptocurrency and digital assets, developed with government and military suppliers to offer enhanced protection. For crypto-fiat banking to move into the mainstream in 2019 others must follow suit, investing in new services to ensure that investing in crypto is as secure as investing in more traditional assets.

 

Regulation

Regulators in many of the world’s largest economies refuse to embrace crypto and blockchain, citing concern over investor protection. However, here too change seems to be imminent. In the UK, MPs have urged the government to bring crypto under the control of the Financial Conduct Authority. They have claimed that, with the proper regulation, the UK could become a global centre for digital currencies.

 

This stance could well be a smart one, as countries such as Singapore, Malta and the Czech Republic are putting in place forward-thinking regulatory frameworks that enable people to invest in crypto with clarity and certainty.  Given growing interest in the sector, these counties could well fulfil the global hub function if the US and UK do not move fast.

 

It’s also worth noting that, while regulation is important, so too is consistency. Regulatory divergence currently costs financial institutions between 5–10 per cent of their turnover – representing up to $780bn each year. Traditional institutions are therefore demanding a unifying approach to compliance and regulation across the globe.

 

High net worth individuals (HNWIs)

HNWIs and family offices will be critical to the adoption of non-traditional digital-led portfolios. With their capability for a more dynamic approach to investment, key leaders in this space will set the agenda for the wider industry. This will be a core factor in terms of legitimising crypto and digital assets, opening the door to wider engagement from institutional investors.

 

By the end of 2019, we won’t be talking about inflection points. We’ll be looking at a radically different investment landscape. EQIBank is working to accelerate the speed, security and accessibility of the crypto-fiat market and looks forward to driving positive change over the next 12 months and beyond.

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