On January 13, 2021, the US Office of the Comptroller of the Currency (OCC) announced that it had given conditional approval to Anchorage Trust Company, a chartered trust firm, to become Anchorage Digital Bank. This has made Anchorage the first cryptocurrency services provider to have received the national bank charter in the United States.
The company was quick to announce that it intended to launch innovative digital currency-based financial products in the near future.
Such recognition for the use cases of cryptocurrency in the financial sector has been pouring in over the past couple of years. In 2019, Visa, in partnership with Coinbase, released a debit card backed by cryptocurrency, which lets users convert digital currency into fiat currency to make payments. In 2020, JPMorgan and PayPal joined in, to permit crypto-based payments on their platforms.
Institutional acceptance of cryptocurrencies has also come in the form of an explosion of DeFi projects. DeFi or Decentralised Finance refers to financial products that are created on a decentralized network, not controlled by any large corporation or government. It is being viewed as a worldwide move to open financial systems. These projects have also received an endorsement from large financial institutions. On December 1, 2020, Visa announced that it had entered into a partnership with BlockFi, a DeFi startup, to offer credit cards that would reward users in Bitcoin.
So, the question is no longer whether blockchain and cryptocurrencies can disrupt the financial sector, but when and how.
“The financial services sector has already made significant investments in decentralised applications to overcome challenges such as security breaches, transaction delays, collateral costs and transparency. The decentralization, immutability, and transparency that cryptocurrencies offer will be the way forward,” states Jean-Yves Sireau, Founder and Chief Executive Officer, Deriv.
The traditional banking sector, consisting of centralized institutions, has long been plagued by problems typical of such centralized networks. Cumbersome regulatory environments or the huge fees customers have to bear, whilst having limited control of their account being a few. Traditional banking is inefficient and time-consuming, while also being vulnerable to data threats.
Cryptocurrencies, on the other hand, offer a much more secure, transparent, efficient, and inexpensive way to complete banking processes. They also eliminate the need to share the personal information of customers with a third party or intermediary. Data integrity is ensured by the immutable nature of all data on the network. No one can change the information, not even the bank.
Even when it comes to bank granting loans, not only can the process of disbursal of funds be expedited, banks can trace where their loaned funds are being used since every transaction will be recorded on blocks in the blockchain ecosystem.
While domestic fund transfers can take just minutes, cross-border ones can take up to several days through the traditional payment routes. In addition, issues like inadequate infrastructure raise concerns regarding the security of international payments, leaving them vulnerable to cyberattacks.
Cryptocurrencies have emerged as the most efficient means to conduct cross-border transactions. The lower operational costs, while also eliminating cyber theft and human error. Since no intermediaries are required for crypto transactions, the costs of processing such payments are significantly reduced for both the financial institution and the customer.
The lack of intermediaries also makes it a much simpler process.
Identity Verification and KYC
KYC is not just done for regulatory compliance, verifying the identity ensures greater security, by weeding out fraud and money laundering.
While digital verification has simplified this process to a great extent, customers need to go through the entire process for every new service provider. Some also require physical authentication of documents.
With a blockchain network, once the KYC process has been completed by one service provider, the verification information can be shared or re-used by other providers.
The customer can choose to give permission for their identification information to be shared over blockchain, so they do not need to go through the entire registration process every time they seek services from a new financial provider.
Smart Contracts and DeFi
Smart contracts have the potential to disrupt the way any business is conducted across the world. In the financial arena, it can completely change how money and information are exchanged. Smart contracts can automate processes in a completely decentralized manner, enabling the implementation of shared rules of conduct, engagement and operations.
Being self-executing, smart contracts take cryptocurrencies much further than efficient means of transactions and record keeping. One way in which smart contracts have made quite a splash is through decentralised finance or DeFi projects. With DeFi, not only are multi-party agreements automated, these agreements no longer require intermediaries, such as lawyers or banks, to ensure enforcement.
In the three years from September 2017 and August 2020, DeFi contracts surged in value from $2.1 million to $6.9 billion. This also led to the skyrocketing of the value of tokens associated with these projects. Tradable native tokens of DeFi smart contracts almost doubled in value through just the month of August 2020.
Enhanced Customer Experience
Most importantly, turning to a cryptocurrency ecosystem to provide financial services can lead to significantly better customer experiences. Not only would it fuel innovation, but it would also lead to secure financial products and services. New products and services could be introduced much faster and in a much more cost-efficient way.
“With blockchain technology, delays due to duplication of information, as well as confusion and conflict regarding service provision can be eliminated. Also, transparency and seamless customer services will become much easier to achieve for financial and fintech firms,” added Sireau.
The Way Forward
Blockchain and cryptocurrencies have the power to transform the financial world by helping to bridge the gap that exists between financial institutions, regulators, and customers. The future financial ecosystem could be one that is characterized by collaboration, innovation, partnerships between traditional entities and fintech start-ups, and increased competition. In the end, everyone will have the potential to benefit from such transformation.
It might be very refreshing to see traditional financial institutions transition from the lumbering behemoths they have been known to be in the past to agile and responsive entities.
Deriv.com is an online trading service provider offering a comprehensive suite of products with flexible pricing, where its customers can trade currencies, indices, commodities, and volatility indices 24/7. Committed to customer satisfaction and high ethical standards, the company delivers quality products and services with integrity.