By Young Pham, Chief Strategy Officer, CI&T
There’s a constant noise surrounding cryptocurrencies in recent months – and for good reason. Bitcoin, Ethereum, Dogecoin, even Britcoin have all been making waves – chopping and changing in a volatile landscape of inflation and Covid-hit economic recovery. Business giants like Elon Musk and even central banks like Bank of England have been throwing their hat into the ring on the future of this technology.
In this sea of opinions, there’s a clear divide between those who see cryptocurrencies as the future of DeFi and payments, and those who deem it far too risky business to deserve a place in the heavily regulated market that is mainstream finance.
So, how should financial institutions be preparing for this uncertain future, and should the post-Covid landscape involve the adoption of cryptocurrencies on a much larger scale? One thing is for sure – the potential of crypto shouldn’t go unnoticed.
Seeds of change
There’s no denying that cryptocurrency has come a long way since the early days, despite its volatility. What was first a speculative investment vehicle has decisively moved into more of a mainstream payment method used by many merchants and consumers. Regardless of what’s being tweeted, crypto has entered mainstream circulation and its share of the real estate is growing fast. By 2026, cryptocurrency market size is expected to grow to 2.2 billion, with a CAGR of 7.1%.
As with every nascent technology, of course, we are not yet seeing all of cryptocurrency’s potential. Yet the winds of change are blowing. Payments is one small aspect of what bitcoin and cryptocurrencies enable. With the unique ability of having programmatically financial instruments, the ecosystem of technology being built on top of that foundation is enabling diverse new use cases. Solutions like the Lightning Network on top of bitcoin for fast, small payments, or collateral-based loans for fast liquidity, start to create possibilities beyond the foundational aspects of bitcoin and other cryptos.
New opportunities
This could not have come at a better time. Following the pandemic, large retailers are increasingly determined to move to a 100% cashless model. For them, the cost of handling cash across thousands of different stores is an added expense that they want to divest. Moving to more digital payment structures, including the adoption of cryptocurrencies, is a path many will start to follow over the next year.
Yet there are also security benefits to consider as well. The cryptographic certainty of cryptocurrencies adds an extra security layer for financial institutions by eliminating forgery risk or counterparty risk that any other current financial instrument has today. Just as digital infrastructure, protocols and processes help financial institutions protect against scams and money laundering with assets, crypto could offer a more secure and scam-proof model.
However, the greatest benefit the likes of bitcoin can provide for international cooperation is by design: a fixed, known and pre-defined monetary policy. One with a financial instrument representation that can be transferred in a fully decentralised and permissionless way, where every international participant can join on an equal footing. It’s the only type of neutral financial instrument in existence where trustless cooperation can happen, opening up unprecedented new opportunities for international commerce.
Embracing crypto
Despite backlash against cryptocurrencies, they are inexorably gaining ground. If established financial institutions don’t find a way to incorporate this technology into their offerings, then someone else will and they stand the risk of losing control. The good news is that this is the perfect time to start. Covid-19 has forced many to challenge their current business paradigms and find better and more efficient ways of doing business. For cryptocurrencies and underlying blockchain technology, we’re on the cusp of a real gold rush.
The obvious path for financial institutions is to create financial instruments that are more and more based on bitcoin. Many start with offering custody services, or additional investment options either directly or through vehicles like Funds, Trusts or ETFs. A financial institution could even offer a credit system based on a collateralised bitcoin loan, which is then used to make the payment in the currency of choice.
Central banks, meanwhile, are looking at issuing a digital currency similar to cryptocurrencies as a way to enable fast changes in monetary policy and a better view of overall financial health and the usage of its currency. This approach is expected and we should see that happening across many jurisdictions over the next few years.
Yet, the biggest opportunity is to understand and envision how this new technology can open a completely new set of services to offer and monetise. This could be compared with the early days of the Internet, where some were looking at how to become Internet Service Providers – these are the banks and exchanges today looking at bitcoin as ISPs once looked at ‘access to the internet’. History showed us that the new business models created on top of the Internet were the ones with the most potential. It’s difficult to predict the form these ground-breaking new services will take, but once they arrive you can be certain we’ll wonder how we ever lived without them.
New world of commerce
For all the headlines about crypto’s volatility, it’s also quietly gaining a solid ground in payments and transactions. So much so that its underlying technology is inspiring massive changes in monetary policy. For that reason, the surge we’re seeing in different cryptos is no fad, and there will be wider ramifications which go far beyond just the payments landscape. Those financial institutions that explore its potential and adapt to crypto will be the drivers behind a whole new world of commerce.
