By Aaron Lazor
CEO of MyChargeBack
A new global study by Visa reveals that nearly 40% of crypto owners surveyed said they would likely or very likely switch their primary bank to one that offers crypto-related products in the next 12 months. Banks, which by nature are reticent of taking risks and slow to evolve, are reading the writing on the wall. And that represents a huge shift in their thinking.
When bitcoin, the first cryptocurrency, appeared in 2009, the consensus in the boardrooms of the world’s largest banks tended to be sympathetic to the view that cryptocurrency was a fraud. Nouriel Roubini, the New York University economist who earned the moniker “Dr. Doom” for having predicted the 2007-2008 housing bust, famously called crypto “the mother or father of all scams and bubbles” and said the blockchain would prove itself to be “the most over-hyped — and least useful — technology in human history.”
Nonetheless, bitcoin has endured and the cryptoverse has expanded at warp speed. So much so that it inevitably gave rise to crypto banks. On September 16, 2020, the Wyoming State Banking Board approved the issuance of a special purpose depository institution (SPDI) charter for Kraken Financial (also known as Kraken Bank), which will be phasing in its services this year to customers online and via mobile devices. And then on January 13, 2021, the Office of the Comptroller of the Currency (OCC) took the first step towards the establishment of the first national crypto bank in the U.S. by granting conditional approval of a federal charter for Anchorage Digital Bank NA. Headquartered in San Francisco (not Alaska), Anchorage calls itself “a full-service financial platform and infrastructure provider for the digital asset space.” Suddenly, legacy banks took notice. Competition does that.
Credit Card Networks Took the Lead
One of the primary investors in Anchorage Digital Bank, by the way, is Visa, which is no coincidence. Both Visa and Mastercard, its arch competitor, have been rolling out their own crypto services, usually in cooperation with fintechs or by acquiring them outright. The end game is to enable the full integration of cryptocurrency, so that all the cardholders and merchants using their networks will be able to conduct any and all of their transactions with digital assets.
And it’s already happening. In the year that began on October 1, 2020 and ended on September 30, 2021, Visa processed $3.5 billion in digital currency transactions. It is no surprise, therefore, that it is launching an advisory practice to help its partner financial institutions navigate the world of cryptocurrencies in order to further mainstream its adoption. Mastercard added a new crypto and digital currency team to its existing consulting division and began to process crypto transactions last October. Because legacy banks issue Visa and Mastercard credit cards and debit cards, they are being drawn into the cryptoverse whether they like it or not. And it turns out that they like it a lot.
Banks have come to understand that blockchain technology dovetails with their own needs. It turns out that it can expedite payments, provide enhanced security and transparency and reduce bookkeeping errors and confusion, if not eliminating them entirely, since the blockchain is both permanent and immutable. And it can even allow banks to lower fees, which will help them reduce customer churn. Therefore, according to one survey published last year, 82% of U.S. banks had already acquired and integrated blockchain technology into their networks and even more ― 88% ― are convinced it will prove to be beneficial for the entire financial services industry.
The Challenge of CBCDs
Banks also have to confront the specter of central bank digital currencies (CBDCs). Nigeria, the Bahamas and the East Caribbean microstates were the first to introduce them, and now most countries are either researching the idea or actively developing their own ones. President Biden’s executive order on cryptocurrency all but commits the U.S. to launch a digital greenback.
Traditional brick and mortar banks are apprehensive about CBDCs, concerned that they could undermine the fiat currency that constitutes the backbone of their assets. After all, CBDCs are to be issued and backed by central banks, which would sell them directly to the public in exchange for fiat currency. Commercial banks fear that would reduce, to a degree that no one can predict at present, the amount of deposits they hold. And since those deposits are made available for loans, their profitability would decline, perhaps to unsustainable levels.
They also point to the fact that, so far, the CBDC experiment has not met with impressive results. The East Caribbean CBDC was a dud, the Bahamas Sand Dollar is restricted to domestic transactions and the International Monetary Fund (IMF) has warned that Nigeria’s eNaira, which was only introduced last November, already could be at risk due to its presumptive use in terrorist financing and money laundering.
How Banks Can Prepare for the Inevitable
Until the kinks are ironed out, traditional banks will be on the defensive, spending a lot of time and effort to reposition themselves as an essential element in the new digital dispensation. Considering the suspicions about the eNaira, for example, banks will have to develop new airtight mechanisms for integrating strict, transparent anti-money laundering procedures into their cryptocurrency and CBDC services. It would be logical to assume, therefore, that they will have to verify in advance that beneficiaries of cryptocurrency and CBDC transfers are not engaging in criminal enterprises, just like they are supposed to do before approving wire transfers.
That requires sophisticated forensic tracing technology and certified investigators that they currently do not employ. Smaller banks, however, may find the costs beyond their means. In that event, they would have to contract out those processes to third party service providers. That solution has its benefits, since the challenge of adopting new services for new payment mechanisms will entail unprecedented numbers of calls from customers who will need to be engaged. And bank service centers, unlike those of third-party providers, are not yet trained to handle them.
About Aaron Lazor
Aaron Lazor is CEO of MyChargeBack and an expert in the field of complex dispute resolution. Over the past two decades, Aaron has established an international reputation as one of the world’s financial services sector visionaries. With an extensive professional background on four continents, he has pioneered unique solutions for digital transactions, including cryptocurrency and credit cards, that have improved the relationship between consumers, banks and crypto exchanges. Under his leadership MyChargeBack has become an industry pacesetter, having successfully intervened on behalf of tens of thousands of clients with more than 800 banks and 450 law enforcement agencies in over 100 countries around the globe.