Bring in the Noise
The noise around cryptocurrencies is currently reaching a level unheard since 2017 when bitcoin reached a then all-time-high near $20,000. That was also the time of the initial coin offering (ICO) boom when mysterious coin offerings attached to celebrities and scams were all the rage. The whole space still felt relatively new and seemed the domain of either anti-fiat zealots or dubious characters doing questionable things.
Though bitcoin and other cryptocurrencies have now surpassed those all-time-high valuations relative to fiat currencies, what is different during this current round of bullishness is that digital currencies are no longer so new, nor are they the province of fringe elements. There are surely still plenty of fanatics and strong opinions, but within the contentious arguments are plenty of saner—or at least calmer—voices, many who are recognizing cryptocurrencies as a genuine new asset class albeit one that has some growing up to do.
Consider some of the headlines in the past few months that have caused even skeptical journalists and analysts to re-evaluate cryptocurrencies:
MicroStrategy Acquires Additional 19,452 Bitcoins for $1.026 Billion
Tesla buys $1.5 billion in bitcoin, plans to accept it as payment
PayPal to let users pay for purchases at checkout using Bitcoin, other cryptocurrency
Morgan Stanley becomes the first big U.S. bank to offer its wealthy clients access to bitcoin funds
Goldman Sachs To Become Second Big Bank Offering Bitcoin To Wealthy Clients
These are only a few of the examples of corporations and financial institutions jumping on the cryptocurrency bandwagon, and the list doesn’t even include the largest crypto-related news story: the direct listing of Coinbase on Nasdaq with a current market cap of around $60 billion.
Add to the mix news around non-fungible tokens (NFTs) (see here, here, and here), and the clamor over digital assets like cryptocurrencies and digital collectibles has become positively overwhelming.
That’s not to say there aren’t plenty of bearish signs about digital assets as well. Turkey has banned cryptocurrency payments, and India is mulling a similar prohibition. Volatility remains an issue. (In the days before this post was written, the value of bitcoin dropped by more than 20%.) And concerns about the carbon footprint of cryptocurrencies continues to be a challenge for advocates to address.
The Crypto Question
With these competing narratives as the context, the question I get often from technology leaders within financial services is simply “Are cryptocurrencies real?” (Or sometimes “Are cryptocurrencies really real?”)
The motivation behind that simple question is clear and reflects a reluctance within financial services to accept that cryptocurrencies—non-fiat-backed currencies whose value is seemingly untethered from anything real—are anything other than a technology-driven fad. For all my personal interest and excitement at the topic, I admit the reluctance is completely understandable, especially when it comes from a traditionally risk-averse industry like financial services.
Here’s my honest answer to that question: “It doesn’t really matter.”
That is not to say that what is happening in digital currencies and blockchain isn’t important; of course, I believe it is in many fundamental ways. But as I argue in a recent report, Cryptocurrency Goes Legit: Institutional and Corporate Adoption of Cryptocurrency, as far as financial services providers are concerned, there are multiple opportunities within the cryptocurrency space. Whether it’s retail customers or corporate treasurers, serious investors or merely curious clients, there is a real need for financial information and services that can be offered by FIs.
Take the example of buying a Tesla with bitcoin. While the process isn’t as simple as writing a check (remember those?), the purchase of a $40,000 car could seem to holders of bitcoin a good use for their cryptocurrencies, i.e. a once-in-a-lifetime purchase that qualifies as a reasonable time to realize some gains from their bitcoin investment even if they believe bitcoins may appreciate over the long term.
But here’s the thing: bitcoin traded for a car after it has appreciated is considered a realized gain by the US government and is, therefore, a taxable event. Shouldn’t financial advice on whether or not that is a good idea be something a financial services provider offers a customer. Or information on gifting bitcoin? Or adding cryptocurrencies to an investment portfolio?
Embrace the Opportunity
Customers across multiple lines of business will need—or currently need—traditional financial services to buy, sell, hold, trade, or liquidate digital assets. These are needs involving risk, liquidity, financial strategies, taxes, and more. These are the services financial institutions have always offered. It doesn’t really matter if cryptocurrencies are “real” or not.
And that doesn’t even take the technology questions into consideration, the middle and back office functions that will be affected by cryptocurrencies, digital assets, and non-fungible tokens. The market is moving inexorably to a greater use of, and reliance on, digital currencies and the technologies they are built on like blockchain and distributed ledgers.
Several dozen countries around the world are already in some phase of designing central bank digital currencies (CBDCs), the digital fiat version of non-fiat digital currencies. Stablecoins and distributed ledgers are being built into products to make online commerce or cross-border payments faster, more efficient, and lower cost. Cryptocurrencies are just the beginning of a bigger transformation, one that financial institutions need to understand.
Skepticism towards any trend that is generating substantial buzz is not only proper, it’s smart. That is particularly true for industries like financial services that are risk averse and heavily regulated. But skepticism shouldn’t be a blanket excuse for doing nothing, especially when that means missing obvious opportunities like those presented by cryptocurrencies and digital assets. There are still a lot of questions to be answered about cryptocurrencies. The concerns I mentioned earlier are only a few of the many issues that still need to be addressed. But from the perspective of financial services providers, it is well past time for banks to begin looking at the opportunities presented by cryptocurrencies and being building their product and technology strategies to include them. For more information on these opportunities, and the challenges facing financial institutions looking at cryptocurrencies, download the IDC ebook Are Cryptocurrencies Going Mainstream?