According to GlobalData thematic research’s 2023 banking and payments predictions, leading banks will continue investing in integrating digital asset business into their offering despite bear sentiment within the cryptocurrency market.

BNY Mellon recently launched its own digital assets custodian platform and JPMorgan launched a fully regulated digital wallet for its customers in November 2022. BNY Mellon CEO, Robert Vince, famously said that ignoring cryptocurrency would be like ignoring the advent of the computer. This perspective is all the more significant coming from one of the oldest banks in the world. Both BNY Mellon and JPMorgan are expected to develop other blockchain-related services in 2023. According to GlobalData thematic research, platforms such as these will allow institutional investors to purchase crypto such is Bitcoin and Ethereum through trusted institutions.

What exactly heralded the crypto winter?

Trust in crypto business is at an all-time low following the collapse of leading cryptocurrency trading platform FTX. However, the basis for cryptocurrency’s creation was, in fact, a lack of trust in traditional financial services systems after the 2008 financial crisis. But the pendulum may well be swinging back to trusted banking institutions, which could benefit from these market conditions, gaining a competitive edge over their crypto-native competitors.

According to GlobalData thematic research, the crypto market’s current trough is likely to continue as inflation continues to rise. “Inflation and cost of living are reducing people’s discretionary funds, meaning fewer funds available to put into crypto to speculate,” according to GlobalData’s 2023 banking and payments predictions.

Despite the current crypto winter, digital asset custody, transfer and settlement provider Fireblocks’ head of financial markets business, Stephen Richardson, says banks have already set the wheels in motion for building digital asset infrastructures into their proposition. “These budgets were agreed a long time ago,” he adds. Blockchain adoption has already been accepted as necessary within the traditional financial institution and payments space, says Richardson. “Business cases have already been built and are being supported, which runs contrary to the narrative that has been pitched out in the market about a crypto winter,” he adds.

Fireblocks consults for various big-name banks on how to build and integrate a digital asset infrastructure into their financial offerings. This provision for operating digital assets is broad, and includes cryptocurrency as well as a spectrum of use cases around blockchain. Among all Fireblocks’ business units, traditional financial institutions are the most active in looking at business use cases and trying to integrate digital assets into their offering.

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The company has around 18 financial markets customers, some of which are heavily on the crypto trading side, while others, such as BNY Mellon, ANZ Bank of Australia, Thailand’s Siam Commercial Bank and Credit Suisse, are looking at a broad set of use cases. “These institutions are in the process of building applications and products for blockchain and exploring the different opportunities in digital assets,” says Richardson.

Different approaches to the crypto conundrum

Cryptocurrency-native organisations (that is those with an existential business case around cryptocurrency) and traditional financial institutions will take a different approach to investing in this digital asset infrastructure, says Richardson. Indeed, following the cryptocurrency market crash in May 2022, many crypto-native companies will not have the budget for infrastructure improvements and innovation.
The digital asset business and blockchain infrastructure development within big financial institutions pivots on a number of factors. Certainly, the question as to whether digital assets are to be classified as securities or commodities will play a critical role, says GlobalData associate analyst Suneet Muru.

The SEC is currently pursuing a case against US currency exchange business Ripple, claiming that it sold unregistered securities when issuing its flagship token, XRP. “If the SEC wins, it will essentially set an industry-wide precedent classifying most crypto assets (with the exception of Bitcoin, Ethereum and a few other big ones) as securities,” says Muru. Suddenly, running a crypto business will become a lot more complex and expensive as companies will be required to comply with strict investor protection rules. More regulatory scrutiny could also mean more penalties, fines, and potentially prosecution. “It is possible we could actually see a lack of future innovation,” posits Muru.

However, Muru predicts the most likely outcome would be settlement, a scenario in which the SEC would nevertheless be able to enforce the idea that most crypto assets are securities. If crypto assets were given a more traditional classification like a security, then banks would have a better starting point for adopting them more smoothly than other institutions. “Banks already keep securities on their books for safety purposes in case they need to free up some liquidity,” says Muru. “So, while crypto assets are definitely not safe, and banks would likely not be using them this way, they should be better equipped to comply with custodian rules than your average crypto business or exchange.”

What is certain is that digital asset regulation is coming, details of which will unfold throughout 2023, as governments and banking institutions get to grips with this novel form of money. Despite plummeting values and eroded trust, cryptocurrencies and digital assets in the broader sense are here to stay – and this might just be the year that institutional banks bring them fully into the fold.