- Banks are launching stablecoins and other digital asset-related products because individual, corporate, and wealth management clients care about cryptos. Even after the crash, global cryptocurrency market capitalization is around 1.13 trillion, and there’s growing interest.
- The 2022 Galitt PayObserver Survey asked consumers in five countries – Belgium, France, Germany, Italy, and the UK – about cryptocurrencies. Over 2/3 are aware of crypto, and more than 20% have used it (particularly Gen Z), exceeding the number of people who’ve invested in shares.
At the end of June 2023, the Markets in Crypto-Assets Regulation (MiCA) was voted on, laying the foundations for broad and uniform EU-wide crypto-asset rules. Covering areas that were previously out of scope under existing frameworks, such as security tokens and central bank digital currencies (CBDCs), MiCA aims to regulate “crypto-asset issuance and service provision in the EU”. Entry into application is expected by the end of 2024.
Below, we explore opportunities and challenges the crypto industry brings to financial institutions (FI), and how they can offer crypto services.
But first, some background. In recent years, three major factors have influenced the crypto world. Firstly, the crypto crash. Given the bear market, prices are declining across the board (including cryptocurrencies), highlighting crypto’s maturity as an asset class.
Indeed, a growing number of institutional players are involved in the crypto space, new financial products are available, regulatory oversight is developing, and pricing is more efficient. However, the vital difference between crypto and traditional finance is transparency, representing a valuable opportunity for the crypto industry to analyze systemic risk, improve systems, and enhance rules for the next bull market.
The second development is stablecoins, where demand is driven by participation in crypto markets and decentralized finance (DeFi). Around the globe, policymakers are drafting and passing crypto-asset legislation, providing greater clarity and certainty regarding stablecoins and the broader ecosystem, giving traditional financial players like banks the confidence to enter the arena and meet demand from their retail and institutional customers.
Third up is central bank digital currencies: According to Reuters, 130 countries are exploring CBDCs, with “almost half in advanced development, pilot, or launch stages”. Indeed, in June 2023, the European Commission (EC) released a draft proposal for a “possible digital Euro”. The objective is to deliver a means of payment that complements cash, but is more suited to a digital-native world. That being said, questions remain, including:
- What will the public accept?
- How will privacy protection be dealt with?
- How easy will it be to use?
- Will it be secure?
Why is it important for financial institutions to provide crypto services?
Banks are launching stablecoins and other digital asset-related products because individual, corporate, and wealth management clients care about cryptos. Even after the crash, global cryptocurrency market capitalization is around 1.13 trillion, and there’s growing interest.
For example, the 2022 Galitt PayObserver Survey asked consumers in five countries – Belgium, France, Germany, Italy, and the UK – about cryptocurrencies. Over two-thirds are aware of crypto, and more than 20% have used it (particularly Gen Z), exceeding the number of people who’ve invested in shares.
Combined with the democratization of crypto, the rise of players like Coinbase, and digital banks such as Revolut offering crypto services, FIs risk lagging behind if they don’t participate. What’s more, given banks are the most trusted partners for cryptos (as per the Galitt PayObserver Survey), they’re in a prime position to attract customers.
Markets in Crypto-Assets Regulation (MiCA)
As financial institutions join the cryptocurrency ecosystem, they need to be aware of the relevant regulatory frameworks. The first rules came in 2018 – an extension of the Anti-Money Laundering Directives (AMLDs), covering crypto assets and wallet service providers.
In 2020, the EC introduced a proposal for MiCA as part of its digital finance strategy. And now, MiCA is approved, regulating crypto-asset service providers while ensuring consumer protection. Key provisions span “transparency, disclosure, authorization, and supervision of transactions”. As such, MiCA is welcome news for businesses wanting to penetrate the cryptocurrency sector.
Meanwhile, during the implementation phase between now and the end of 2024, bodies like the European Central Bank (EBA) and European Securities and Markets Authority (ESMA) are responsible for consulting with the public on technical standards and developing additional measures.
Elsewhere, Hong Kong and Dubai have introduced crypto-assets regulations, the UK legislated the Financial Services & Markets Bill, and advances are occurring in the US.
Sopra Steria’s partnership with Chainalysis
To leverage crypto-assets effectively, financial institutions need a structured and robust strategy that takes the following into account:
- Types of crypto services they want to offer and target clients
- Risk levels they’re willing to tolerate
- Working with third-party crypto service providers
- Training existing teams versus building new ones
And then, the next step is implementation. To understand risk exposure, investigate high-risk transactions effectively, and ensure regulatory compliance, they can leverage the expertise of a trusted expert like Chainalysis – a blockchain data analysis firm.
Sopra Steria’s partner since 2022, Chainalysis’ products and solutions help FIs mitigate the risk of engaging with cryptocurrencies – together, we can guide them on their crypto journeys.
Progressive and structured cryptos approach
With MiCA, a homogenous and comprehensive European regulatory framework is on its way, offering clarity and visibility while leveling the playing field. As a result, now is an opportune time for banks to enter the crypto arena, especially given Galitt’s trust statistics.
Cryptocurrency is incredibly transparent, operating on a public ledger whereby anyone can look up entire transaction histories using a public block explorer. However, reading via blockchain is complicated. That’s where Sopra Steria and Chainalysis come into play, helping banks monitor transactions and risk, and meet ever-evolving regulatory requirements.
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