Digital Assets Are Coming. But Maybe Not in the Way You Think.
9 September 2024
‘Digital asset management is no longer optional for financial institutions.’ That’s according to fintech writer Ian Horne who also leads content at one of the world’s leading fintech conferences. More and more people are starting to agree.
The use of digital assets as investment and decentralised finance more generally has grown from a desire to “facilitate peer to peer transactions, without the need for financial intermediaries.” But despite the promise of finance without borders, it would seem institutional support is needed in order to increase adoption amongst consumers.
A recent VISA study found that 59% of consumers believe digital assets require established financial institutions to achieve wider adoption. Responding to this, HSBC, JP Morgan, Deutsche Bank and many more established multinational financial institutions are working on digital asset management offerings.
There is clearly an appetite for digital asset investment that needs to be served. Interest has exploded in the last 5 years, with crypto and retail investor platforms offering ease of access to a new asset class. The total value of tokens deposited in DeFi applications is around $80bn. The good news for financial institutions is 39% of existing crypto owners say they will switch to a bank that offers crypto products this year, according to the VISA study.
There is a clear distinction between Crypto assets which are no official means of payment, and Central Bank Digital Currency (CBDC) issued by central banks, which many countries are exploring at moment. But given the popularity of Crypto as an investment asset, it’s now advisable for banks to get on board.
There may be a slight irony in digital asset investment only being palatable to the masses when a third party is involved, but we’re still intrigued to know what benefits remain for consumers and financial institutions in this area. Giesecke+Devrient have now entered this field, looking to make it easier for providers to offer digital asset management services, with their new product Convego TruSafe. Alex Gatiragas, their Director of Solution Experience, is cautiously optimistic about the future potential of this technology.“For mainstream adoption, we need to make sure it's simple…”
Where we are now
According to Gatiragas, one driver for established institutions to get involved is that fintechs and newer players are already there. Increasingly, the likes of Revolut offer easy ways to store crypto and other digital assets as well as popular exchanges such as Binance and Coinbase. “Traditional financial institutions are being challenged by the new entrants in the market.” In theory for banks, once they “introduce similar capabilities within existing channels, accessing these services should be simpler.” “The immediate opportunity,” says Gatiragas. “Is in laying the foundations for these digital assets by providing custody related services. A way to safely and securely hold onto those assets just as I would hold shares in a company or precious metals for example.” “Purchasing digital assets and holding them as an investment vehicle,” is currently the main use case for most consumers. The release of crypto based ETFs at the start of 2024 helped validate and establish them further as an asset class and major US banks have now given the green light for wealth advisors to sell them to clients. People now have a blend of investments from foreign exchange through to shares, ETFs and now Bitcoin and other digital assets. However, for the time being the value of individual crypto assets fluctuates wildly, making it very difficult to see them as a reliable form of payment.The barriers and a way through
Even as an asset class there are certain hurdles that need overcoming before digital assets can be widely used. “I think the main barriers are convenience, trust and security. We need to build trust in the market itself, because unfortunately there have been cases where hacking has occurred, consumers’ funds have been mishandled, or the experience has simply been too cumbersome.” To repair the dent in consumer trust following such cases, regulation is needed. The MiCA (The Markets in Crypto-Assets) regulation in Europe should enable crypto firms, such as issuers, exchanges and wallet providers, to operate throughout the European Union if they secure licensing and have provided some clarity on what you can and can’t do. Gatiragas says “MiCA is a benchmark for global regulation. A lot of regulatory bodies are looking at MiCA, and taking the good bits out of it. Our entry into this market was highly driven by the regulatory environment so it made sense for us to closely follow what they were doing.” Asia is further ahead still, with certain countries making huge strides forward in the digital asset space. In Singapore, a pilot run by the MAS looking at the adoption of DeFi protocols in regulated markets, identified the importance of regulated institutions acting as “trust anchors,” issuing and verifying the credentials and identities of participating entities. User experience also has a huge role to play. “For mainstream adoption as digital investment, we need to make sure it’s simple,” says Gatiragas. Digital wallets could be what’s needed to help with this. Undergoing increasing adoption through the likes of Google Pay and Apple Pay, digital wallets are also being used for boarding passes, train tickets, and more around the world. According to a recent Worldpay report, digital wallets are expected to comprise half of all e-commerce spend in the UK by 2027, worth £203.5 billion. However, debit and credit card use is still significant, accounting for 46% of e-commerce and 74% of POS transaction value in 2023. Banks can’t move away from them yet. Offering secure digital asset custody however could present a fresh business opportunity.“The immediate opportunity is in laying the foundations for these digital assets by providing custody related services.”