An internal memo by the Bank of America shows that it has created a team dedicated to researching cryptocurrencies and related technologies. This makes it the largest financial institution so far to join the crypto world.
The memo first detailed by Bloomberg indicates that the bank believes it is uniquely positioned to be the thought leader in cryptocurrencies and related technologies. Given the cryptocurrencies position as the fastest-growing emerging technologies, it can use the bank’s strong industry research standards, blockchain expertise and global payment platforms.
This new crypto team will be led by Alkesh Shah, a founding member of the bank’s data and innovation strategy group. Shah will report to the head of the bank’s fixed income, commodities and currencies research, Michael Maras.
Even though the Bank of America takes pride as the leader in financial innovation, it has been slow to embrace cryptocurrencies. Already various investment banks have introduced or are in the process of offering crypto-related services to their clients. Some of the megabanks offering crypto services include; Goldman Sachs, JPMorgan, Citi Group, and Standard Chartered.
As the second-largest bank in the US, the research on cryptocurrencies will impact the whole economic setup. Even though various US bank crypto is already operating, the entry of the Bank of America gives the crypto economy the needed validation.
The creation of the research team comes after a sustained alliance with cryptocurrencies from the bank. Earlier on, the bank had declared in a research note the central bank digital currencies (CBDCs) as a more effective payment system than cash. It then went ahead to state that CBDCs could replace the cash in the distant future.
By creating a research team, the bank is indicating that cryptocurrencies are the future of the economy. As the leading bank, it has to keep with the trend and provide what the clients need. This for now and the future seems to be the crypto products and the related technologies.
What does this mean to the future of cryptocurrencies?
So far the relationship between cryptocurrencies and banks has been variable. Upon introduction, banks never embraced cryptocurrencies majorly due to their decentralisation.
Banks are the backbone of the global financial system. While the central bank determines the supply and value of fiat currencies, the banks handle all the retail money services. Cryptocurrencies however seemed to threaten the place of the commercial banks. The lack of a central authority means the banks and other regulators would become redundant.
The other reason banks never warmed up to cryptos earlier was the risk. The decentralisation of the cryptos means the investors are up to the volatility and the other risks of the free market. That explains why banks like Goldman Sachs advised their clients against investing in cryptos.
However, after some time it became apparent Bitcoin and other cryptocurrencies were not passing wind. Instead, they were part of the economy and would replace the traditional stocks and banks. The clients kept on demanding the crypto products, fueled by the rising crypto values.
The crypto world suddenly had the answers to all the crypto concerns. As Bitcoin became mainstream, various governments legalised it and started developing a regulatory framework. Stablecoins also became available to offer the needed market value stability.
With time the retail bank clients and institutional investors began demanding the cryptos and the underlying distributed ledger technology (DLT); particularly the blockchain technology. Various fintech, venture capital funds and institutional investors started committing more to cryptos. The banks could no longer ignore cryptocurrencies.
Still, that is not to say the Bank of America gives a green light to all the general cryptocurrencies. Instead, it is looking at the possibility of the CBDCs success. These are the digital currencies in digital form. Instead of the government and banks ceding authority to the cryptos, they can stay relevant by introducing government-backed digital assets. This comes with the control, safety and stability that comes with fiat currencies.
A report in May by Bison Trails established that over 80% of central banks are exploring digital central currencies, with over 40% already trialling them. The American bank believes the CBDCs are inevitable in the long run. It cites the already widespread usage of blockchain technology by the private sector, the potential counter to losing control over currency and the possible economic gains.
The bank also believes the other banks that will fail to launch the CBDCs will struggle to gain clients. It cites the central banks’ cautious approach to the CBDCs as an assurance of security to the users. As such, there will be no need for stablecoins as digital money would also act as a stable store of value and medium of exchange.
By forming the crypto research team, the Bank of America is ramping up its commitment to provide crypto services and to explore all the available potentials.
The entry of the Bank of America, confirms that cryptocurrencies are part of banking going forward. It doesn’t matter the types or nature of the currencies, the US bank cryptocurrency must find a way to accommodate them. Otherwise, it will be a risk and a loss to the banks more than it will be to the crypto world.
How can banks succeed with cryptocurrencies?
After establishing that cryptos are an unavoidable part of the banking facilities, the next concern is how best the banks can use these digital currencies. Of course, it’s normal that some banks will stay sceptical. However, they will still make it work when they do everything right. It is common knowledge that analysing the potential of success is part of the Bank of America crypto research team role.
Some of the ways the banks make cryptos work for them include;
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The right crypto offerings
Even though banks are just joining the crypto market, they have high chances of disrupting the market. The banks already have the trust side of operations sorted, they therefore only have to provide the right offerings to become the new crypto market movers.
The crypto market is not limited to digital currencies. Instead, it is a combination of several tokenized items. Already, the banks have felt a threat by the decentralised finances (Defi). These services offer financial solutions without having to use third parties like banks. To stay relevant the banks might have to offer loans and other financial solutions through blockchain technology.
The US bank cryptocurrency must also be ready to evolve with the changing landscape. Even though started by traditional investors, the crypto world has attracted several millennial investors. These are a new breed of investors who don’t believe in security. Instead, they are after fun and they enjoy taking risks. That is why even though Bitcoin remains attractive, it is already called a “Boomer coin” by these millennial investors. As of now Dogecoin, Ethereum and other new coins are the most preferred investment options.
It takes an evolving bank to offer the right crypto products to stay successful.
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Mitigating risks
Even though offering the right products matters, it won’t mean anything if the banks cannot protect against the risks such new technologies come with. It is for this reason that the Bank of America had hesitated to join the crypto offerings.
Also, instead of getting into the market like any other bank, it first had to form a research team. The team will ensure due diligence to establish all the possible risks and then come up with the best solutions. That way, the bank is already setting itself up for success when it comes to offering clients crypto-related services.
Apart from due diligence, the bank should also deploy various mechanisms to ensure security. The lack of a central authority means cryptos can be used for illicit transactions. The banks must protect their clients by implementing the Know Your Customer (KYC) protocols.
Already the banks are highly regulated, it is only right that they follow the regulations when offering crypto services. Given that cryptos have a global outreach, the banks can consider structured regulatory compliance (SRC) practices. The harmonized regulations will come in handy when offering cross-border transaction services.
Lastly, the banks must stay as thought leaders in the crypto world. Even though cryptos do not need banks or any other authority for direction, the banks must act as the custodians, as they have with fiat currencies. This will increase customer confidence to expand cryptos and the banks at the same time.
Leading US banks exploring the future of crypto FAQs
What are the possible impacts on non-bank financial institutions?
Unlike banks, the non-bank financial institutions are less regulated, hence greater flexibility. They are likely to gain more from the crypto wave as they can easily tailor their offerings depending on demand. The banks can even rely on these institutions when adopting crypto services.
Must banks adopt cryptos?
Yes, if they want to survive in the long term. For some time it seemed like banks could do without cryptos. However, as cryptos become more mainstream, it seems necessary for the banks to provide the services. Banks without cryptos will lose clients and possible growth. That explains why banks that were slow to embrace cryptos like the Bank of America are opting in.