A new report from the American Bankers Association (ABA) recommends banks partner with crypto firms. The report cites both an increase in profitability of the crypto space and rising client interest as reasons.
In a detailed 20-page report, the ABA reveals an in-depth outline of the crypto space, which includes a glossary of terms and current crypto business trends which line up with bank services and products. The report goes as far to provide banks with revenue earning use cases and the hot topic regulatory issues for each.
According to the breakdown from the report, crypto assets fall under four categories: cryptocurrencies, stablecoin, central bank digital currencies (CBDC), and non-fungible tokens (NFTs). The report also touches on DeFi.
What Banks Need to Know
As mentioned previously, the report from The ABA not only explains crypto in a way that is understandable to those working in traditional finance, it also lays out use cases particular to banks.
The use cases recommended by The ABA report are:
- Store of Value – The example being companies who facilitate the store of value in digital assets can earn revenue via buying and selling on their platforms.
- Custody/Wallet Provider – Here it touches on crypto businesses that offer digital wallets, and how they can theoretically charge a service fee, as many banks do with traditional checking and savings accounts.
- Interest Bearing Accounts – A client lends crypto for the sake of gaining interest and the holder/broker (the bank in this report) could earn a portion of the interest earned.
- Payments – Similar to fee charges for debit or credit transactions.
- Lending – Crypto lending could be provided at a fee.
- Exchange Trading – Includes various forms of fee collection: transaction fee, listing fee, deposit fees.
- Broker-Dealer – A common brokerage fee but for crypto assets.
- Insurance – The report highlighted decentralized insurance, which entails a number of investors sharing the risk in exchange for the insurance premium.
- Network Utility – This example outlines utility tokens as instant revenue.
- Asset Management – Banks could charge a fee for servicing a crypto portfolio.
All of the above use cases are one’s in which banks can easily grasp through their current activities within traditional financial spaces. However, when it comes to fees, the crypto space often seeks to lower or eliminate them all together. Banks must be clever in order to cash in through the various ways listed above.
Understanding crypto regulations
Of course, the report touched on the current hot topic of the crypto world: new federal regulations. It was just this past weekend that the Senate released a preliminary draft of future regulations aimed at crypto exchanges.
The ABA informs banks on everything it entails to offer or sell crypto, along with money transmission and tax (potentially information) reporting. These are, of course, important understandings as traditional financial institutions consider dipping their toes into the unknown waters of crypto.
It’s also important that the report highlighted the true lack of clarity within the space regarding regulations. Everything is so new and rapidly changing. Federal entities only now are beginning to wrap their hands around how to manage the space.
Digging into DeFi
Lastly, the report comments on a few other areas of prominence within the overall decentralized space. Those things being DeFi and the environmental concerns surrounding cryptocurrencies. Altogether the combination of the topics mentioned in the report are those that should be understood by any person or institution getting into the space.
“With the increasing profitability of the crypto industry, banks have found it more lucrative to take crypto companies on as partners and their customers as clients while crypto companies need banks to provide access to the payments’ system to onboard and offload fiat deposits,” the report reads.
As banks seek out ways to keep up the pace with the evolving crypto and decentralized finance scene, there seems to be clear in-roads. The ABA recommends that they hop on the opportunity.
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