Traditional finance is often viewed as the antithesis of bitcoin and cryptocurrencies. However, there should be, and needs to be, an overlap between the two worlds. The retail market was the driver of the 2017-2018 bull market, but the institutions will be the ones to drive the current one.
Our financial systems are antiquated, at best. No one knows this better than those working within them. They are in need of a huge overhaul and will receive that in the form of bitcoin and a digital revolution.
Eva Lawrence is the COO of Arcane Crypto AS, a bitcoin and digital asset focused company listed on Nasdaq First North, building the financial and payments system of the future. Eva was previously at Morgan Stanley for eight-plus years, most recently as a trader and Head of EMEA Flow Trading in Securities Lending.
We have seen significant players from the traditional finance sphere starting to recognize this paradigm shift. Morgan Stanley is considering betting on bitcoin with its $150 billion investment arm. BNY Mellon and Deutsche Bank are offering crypto custody. And JPMorgan concedes it will have to be involved in bitcoin. Banks are receiving interest from their clients, seeing the gap in their offering and not being involved is now too much of a risk.
Satoshi Nakamoto described the Bitcoin network as “A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” This seems to explicitly exclude financial institutions from Satoshi’s goal of a digital asset revolution.
If bitcoin is anti-establishment, what happens when the establishment joins the party?
Participation of financial institutions might not be a requirement for the success of bitcoin. In fact, decentralization is one of bitcoin’s key advantages. Still, institutional involvement will accelerate the adoption and accessibility for the masses.
See also: Ajit Tripathi – Banks Need to Adopt Crypto, Now
Institutional adoption can also be good for the market in general. With the support of traditional finance firms, crypto firms will have more clout with regulators and therefore a greater likelihood of a regulatory framework that is somewhat workable and tailored to crypto. These institutions are used to dealing with the red tape and political games this space is already starting to face.
When the U.S. Office of the Comptroller of the Currency (OCC) confirmed that national banks could custody crypto assets, it was a significant development. Once this service becomes widely available, investors can ask their current financial services provider to custody all of their assets in one place, if they choose.
Justified or not, the entry of large financial institutions into crypto, especially via trading and custody, will bring increased legitimacy to the market. Seeing State Street or JPMorgan trading bitcoin could lead more people to exploring the area themselves. While many will go with a third-party provider, some will discover the possibility of self-custody and learn how to take full control of their own coins.
Involvement of the traditional finance sector will lead to increased acceptance of crypto companies by banks, improving access to open accounts. It will also add more custody solutions to the market and bring about more competition. This will result in more options for entry via companies that you might already have a relationship with and solutions tailored to your risk appetite or concerns.
If traditional financial institutions are able to facilitate crypto trading, they will build out support for blockchain infrastructure. This will enable more investors to enter the market, provide better liquidity and price discovery, bring more money into the space and encourage more development. This positive feedback loop will lead to overall growth in the industry and remove some of the perceived barriers for entry.
At the same time, bitcoin and cryptocurrency adoption will shine a light on some of the failings of traditional finance, which should lead to industry reform and development to the benefit of companies and consumers.
Consumers are currently subjected to a multitude of charges to access their money: handling and processing fees, credit card charges, ATM withdrawal fees, overdraft and inactivity fees. Despite these fees and charges, the system does not enable 24/7 settlement. Crypto transactions can be verified and settled almost instantly. They can’t be reversed (avoiding chargebacks) and have competitive fees in comparison to traditional financial institutions and payments providers
Traditional finance has clunky onboarding, repetitive know-your-customer (KYC) requirements and assets are no longer traceable once currency is withdrawn from your account. Cryptocurrencies provide the opportunity for streamlined KYC, a transparent ledger and easy interoperability between different assets. Blockchain transactions will lower onboarding and compliance costs and provide 24/7 access from anywhere in the world.
The rise of DeFi and CeFi
Decentralized finance (DeFi) offers a more accessible, transparent framework for financial services, without middlemen taking a spread. Although some consideration needs to be given to the risks involved due to lack of regulation or third-party oversight, breaking down and then rebuilding financial products in this way should not be dismissed.
DeFi provides quick and convenient access to C2C lending, high-interest earning projects and staking for returns. All of this allows you to earn interest on your savings, to make your money and assets work for you. DeFi enables you to trade one asset for another 24/7, without hefty fees currently applied by each agent involved in the process. There are no delays caused by having to wait for your USD to settle, your wire to process or your bank to open.
The degree of decentralization of each DeFi project varies from protocol to protocol. Some, like Dharma, used centralized price feeds and centrally provided liquidity. Others, like Compound and Maker, have centrally controlled interest rates and platform improvements but controlled by a DAO (distributed autonomous organization).
Traditional finance will likely want to be more on the CeFi end of the spectrum, retaining an element of centralization. (I realize that a centralized DeFi system is somewhat of an oxymoron.) Perhaps they will use permissioned or so-called enterprise blockchains, rather than a public blockchain like Ethereum.
The DeFi of the future might look a little different from DeFi today. However, the principles and underlying technology should not be ignored. Traditional financial institutions will need to adopt certain parts of the DeFi infrastructure or get left behind. DeFi provides traditional finance with a new way to offer financial products, reduce costs, barriers to entry and diversify their revenue streams.
Moving forward together
Crypto purists have long since had (a justified) distrust and skepticism of the existing financial system and the main players within it, a feeling that has been mirrored somewhat in traditional finance’s views about crypto. As the two ecosystems move towards convergence, the focus should be on collaboration for the development and improvement of the existing system, rather than an either/or mentality. Crypto is about to get the chance to make the changes it set out to and turn the current financial system on its head.
Financial institutions and the traditional markets in general might find themselves to be less significant in the future, but they will still need to swiftly adapt to fit in with this rapidly evolving ecosystem.
We are each building our own bank of the future and, ironically, it will be the traditional financial institutions that will help us develop it and execute on our crypto exit strategy to escape traditional finance.