As we described in a previous article, digital assets are enjoying faster adoption and development, in part due to their potential to be an alternative investable asset class. Similarly, decentralized finance (DeFi) is being seen, at least to some extent, as an alternative to centralized and regulated financial services that can enable greater financial inclusion of the unbanked or underbanked. Digital assets have the potential for spectacular growth during the next decade, led by developments of central bank digital currencies (CBDC), stablecoins and tokenization of assets.
This alone would help explain why established banks are exploring opportunities in this space. But besides the benefits of retaining existing customers and the speed, cost and efficiency gains in blockchain/DLT, engaging in digital asset activities can also provide these banks with opportunities to attract new customer segments, unlock new revenue streams and differentiate themselves from competitors.
Crypto for Payments and Custody Services
With numerous use cases in digital asset services, banks may choose to offer commercial banking services to businesses that hold crypto assets, enable payment processing and settlements for digital transactions, and evolve from providing traditional custody services (safekeeping, depositary and settlement services) to next-generation of secure digital asset custody services (staking and access to DeFi markets).
Other opportunities include providing merchant processing services using crypto assets, crypto wallets and rewards, crypto-based savings accounts and operating crypto ATMs. For instance, Mastercard partnered with Bakkt, allowing banks to provide bitcoin wallets and offer crypto rewards on debit and credit cards. Quontic Bank offers a Bitcoin Rewards Checking Account that allows customers to earn Bitcoin rewards by swiping a debit card.
Banks can offer peer-to-peer (P2P) crypto payments through existing online banking platforms or use cryptocurrencies as rails for international fiat transactions. Cross-border payments, gig economy payments, stablecoin settlements, CBDC-based wholesale and retail payments and decentralized payment rails are the areas of potential digital asset-based payments in the next few years. Stablecoins and CBDCs are digital assets with potential use cases in payments and can be used in trading and settlement as well as to improve cross-border payments, inter-bank clearing and settlement and financial inclusion.
Recently, Federal Reserve Bank of New York (NY Fed) launched a 12-week pilot program to test the feasibility of the digital dollar based on DLT with Mastercard, SWIFT and big banks like BNY Mellon, Citi, HSBC, PNC Bank, TD Bank, Truist, U.S. Bank and Wells Fargo. In addition, the NY Fed’s innovation center has collaborated with the Monetary Authority of Singapore to jointly experiment with the potential for wholesale CBDCs to improve the efficiency of cross-border wholesale payments involving multiple currencies.
In these ways, banks can capitalize on multiple revenue opportunities, such as crypto trading fees, DeFi yield by becoming liquidity providers for DeFi loans, tiered subscription models, cross-selling products and exchange fees for digital asset custody services, transaction fees, stablecoin issuance and redemption fees and CBDC deposit-based revenue.
The following chart outlines the digital asset use cases with the greatest potential.
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Digital Asset Use Cases |
Description |
Examples |
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Trading/Investing |
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Goldman Sachs offers OTC crypto trading, including options and futures, in Bitcoin and Ether. USAA does not directly offer crypto investing services but allows USD deposits into a licensed crypto exchange, like Coinbase, to buy digital assets. |
|
Custody |
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BNY Mellon, JP Morgan and Citi partnered with Fireblocks, NYDIG and Metaco, respectively, to offer crypto custody services. Nomura’s JV Komainu custody and Standard Chartered’s Zodia custody (a digital asset JV between Standard Chartered and Northern Trust) platforms are examples where banks used their in-house technology to build digital asset custody solutions.
|
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Lending and Collateral Management |
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Goldman Sachs has a Bitcoin-backed cash loan product. Coinbase has taken out a loan from Goldman Sachs using its Bitcoin assets as collateral. Customers Bank plans to roll out loans using crypto as collateral for existing institutional customers. |
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Staking |
|
Digital bank Revolut offers crypto staking for customers in the U.K. SEBA Bank’s Ethereum staking service is an institutional-grade offering enabling clients to earn staking rewards on Ethereum. |
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Asset Tokenization |
|
U.S. Bancorp has invested in tokenized assets network firm, Ownera, which is working to digitize paper-heavy and illiquid private markets. The DTCC, a centralized clearing and settlement company, is launching a platform that will enable tokenization of private market securities. |
Understanding what’s happening in the market is key to making a move. But it’s changing rapidly – and easy to get left behind. ISG helps financial institutions think through the use cases that make the most sense for them. Contact us to get started.
Check out the next article in this four-part series about banks and digital assets here.
About the author
Owen Wheatley
What he does at ISG
To say Owen Wheatley comes prepared to work through your operational concerns and transformational needs is an understatement. As ISG’s Lead Partner of Banking and Financial Services, he treats his 25+ years of experience in this ever-evolving, customer-centric field as a replete lexicon of applicable knowledge, relevant learnings and potentially executable solutions. In doing so, he makes the ethereal and theoretical, actual and obtainable.
Past achievements for clients
Knowledge-sharing is second nature to Owen. He provides his clients with market insights and meaningful thought leadership and helps them understand what similar (or different) organizations in comparable situations have done regarding transformational change. Many of Owen’s clients have sought his expertise to strengthen their customer engagement on the digital front, enhance the employee experience to improve the customer one and navigate new ecosystems—like integrating emerging partnerships—endemic to the industry. He makes sure that untangling this complexity and harnessing your new relationships always lead to your number one goal: driving better results for your banking or financial institution. In fact, Owen:
- Led a consulting team to design a commercially groundbreaking and elaborate deal for one of the largest hedge funds in the world to reimagine its middle and back-office operations, lessen the bureaucratic demand on the front office and serve institutional clients better. The measures of success for this co-designed and collaborative project included defined stages of excellence and experience metrics, delivered in a commercial model which positions all parties for success.
- Managed a large team of advisors to provide market insight and an "outside-in" perspective to multiple major North American banks looking to transform their operations, including indirect auto lending, core banking, cheque processing and the entire cash ecosystem.
- Led a team of experts in helping to transform the HR technology and operations of a major European bank, including designing the right strategy, creating the roadmap and business case, selecting the right partners for a new ecosystem and ensuring expedited and effective implementation.
