How Can Banks Get On the Crypto Bandwagon Safely?

The institutionalization of digital assets marches on, with stablecoins providing an entry route that addresses some of market fears. Confirmation of this has come from a bank that handles over 10% of Europe’s B2C payment volumes, which announced it is preparing to include stablecoins and central bank digital currencies (CBDC) on its payment rails.

Tech-first licensed payments bank Banking Circle recently announced it is adding USDC stablecoins to its rails for payment acceptance, processing and settlement. A move like this could prompt banks to get involved in digital currency as part of their transaction settlement systems.

Stablecoins are the basis of much of the growing crypto and Web3 economy. These instruments pegged to an asset (such as the U.S. dollar in the case of USDC) serve as a trusted, interoperable and highly liquid currency for thousands of projects running on the world’s leading blockchains. Institutional decentralized finance (DeFi) protocols such as Credix use USDC for stable, programmable liquidity. DeFi apps such as Friktion leverage USDC in on-chain structured products.

The opportunity for banks is clear if they want to maintain their role in the global payments ecosystem and start participating in the digital economy. As an example, look at the data surrounding USDC.

As of the beginning of July 2022, Circle, USDC’s issuer, said there have been $5.05 trillion on-chain transactions backed by USDC and $55 billion USDC coins in circulation.

USDC is a fully reserved stablecoin, where the digital value of USDC is backed by cash and short-dated U.S. Treasury bonds, held in the custody of leading U.S. financial institutions. USDC is not the only asset-backed or fully reserved stablecoin. Paxos USDP is another.

Choosing to add such asset-backed stablecoins onto its payment rails highlights Banking Circle’s belief in their stability against fiat currencies. Stablecoins will give banks and payments providers the ability to facilitate payments outside traditional bank systems. The reconciliation, speed and cost advantages are significant. Banking Circle will act as a bridge between fiat bank accounts and stablecoins, which offer faster settlement than fiat transactions without any of the correspondent bank and network fees. It also cuts out the need for significant IT or financial investment for businesses that want to get into the Web3 market. Stablecoins are a key step in democratizing global finance.

Eliminating the missed opportunity

Central banks around the world are also developing central bank digital currencies (CBDC), digital versions of their national currencies backed by government commitment. Melding the advantages of digital asset markets, such as faster transactions, with the reassurance of low volatility, CBDCs are in development in many countries including those of the eurozone, Canada, Sweden, China, Brazil, the U.S. and U.K.

While stablecoins and CBDCs are different, they are two sides to the same coin: namely the digital representation of value, backed by an asset. Institutions may have been wary of stablecoins due to concerns about their backing, valuations and the publicized collapse of the algorithmic stablecoin USDT and its twin token LUNA. But for banks and other financial institutions the opportunity cost for not being involved in these markets is huge.

The digital assets industry has been working hard to reduce risk by improving fraud and money laundering defenses, which are important reassurances for banks and other financial institutions. The acceptance, transaction and settlement of digital assets will grow even faster as banks and other payments providers gain confidence and become fully engaged.

Payment focus

Specifically, stablecoins bring a number of attributes that make them appropriate for institutional payments. They are based on the fundamental speed and immutability of blockchain transactions, while lacking the volatility of other forms of digital assets and tokens. They are also the bedrock of the rapidly emerging DeFi, Web3 and multiverse economies in which banks are increasingly looking to participate. They are a product whose development is led by demand rather than supply, which ensures their utility and durability.

There are challenges that will still need to be addressed over the next two to three years. For example, the high cost of transacting on the Ethereum network is one of the key considerations for banks looking to join the digital assets revolution, although costs should fall as new coding layers are introduced.

The coming of age of digital currencies will be led by stablecoins forming an increasingly important part of the institutional payments ecosystem. Providing the facility to convert fiat to stablecoins in USDC gives financial institutions the ability to send funds in stablecoin easily and with full regulatory compliance.

Banking Circle is embedded at the heart of this global payments ecosystem, providing banking services to the biggest players in the market. The fact that it is offering stablecoin rails provides banks and other nonbank financial institutions with an entry to a growing market they cannot afford to miss.