In recent years, traditional finance institutions have become increasingly involved in digital assets and blockchain technology.
Singapore’s leading banks – DBS, OCBC and UOB – have all explored use-cases such as tokenisation in an effort to unravel the future of finance. With potential benefits such as real-time settlement and better accessibility, blockchain is steadily transitioning from an experiment to an essential.
At the recent Token2049 in Singapore, the heads of digital assets for DBS and Standard Chartered, and the CEO of Sygnum – the world’s first digital asset bank, based in Singapore – gathered to discuss the future of crypto from a banking standpoint.
Challenges in offering crypto services
As Standard Chartered’s Rene Michau explains, there are two ways in which banks can participate in the digital assets ecosystem.
“One is banking the ecosystem – providing traditional services such as [access to] bank accounts and payments to cryptocurrency firms. The other is bringing crypto products to market.”
Both of these come with their own set of challenges. Starting with the former, Michau says, “This has been a challenge in terms of regulatory certainty – the KYC and CDD [procedures] that are required.”
In the US, the banking industry came under scrutiny this year following the collapse of Signature and Silvergate banks. Once known to service some of the world’s largest crypto companies, both banks came under pressure following the FTX crash. Panic in the crypto markets is believed to be one of the reasons behind a large volume of withdrawals which subsequently triggered the failure of these banks.
Ever since then, crypto clients have had a tougher time finding banking partners in the US. Regulatory warnings – expressing the need for additional risk management – have also disincentivised banks from servicing the crypto industry.
Moving on to the next form of crypto participation, Michau explains the leap which banks must take to embrace digital assets.
“The way that we work today is with a set of ledgers within the bank. We use messaging systems like Swift and other clearing networks to update each other’s ledgers so that everything matches. But fundamentally, we have the admin username and password to the databases that sit within our organisation.”
“Now, if we talk about offering products on a public blockchain, these are networks where we don’t have the admin password. We have to focus on securely managing public-private key pairs, whether it’s for our own money or our clients’ money. That’s a much more complex set of challenges to work through and a very, very different paradigm.”
Crypto opportunities for the banking industry
On the flip side, there is also a lot to gain for banks entering the crypto space. Servicing crypto clients might demand more by way of due diligence, but it could open the doors for a large volume of customers.
“We did a bit of research – there are about a thousand Web3 companies in Singapore, close to 500 in Hong Kong,” says DBS’ Head of Digital Assets, Evy Theunis. “There are quite a lot of companies and they do need access to bank accounts. That’s something we can help with.”
By partnering with crypto exchanges and custodians, banks could also gain access to a wider customer base. Traditionally, a bank might operate within a few countries and service customers who are based there. However, having crypto clients such as Binance or Coinbase – which operate in over 100 countries – would allow banks to service a clientele far beyond their usual reach.
Blockchain technology could also help banks transform the way in which they conduct business. This has become apparent through experiments – such as foreign exchange trading using tokenised assets under Project Guardian – which banks have been a part of in recent years. That said, it’ll likely take time before this new technology wholly replaces existing systems.
“The security token space doesn’t just require the technology to be ready and scalable. It also requires you to have liquidity in the system, and to be able to get a secondary market up and running. These types of real world issues need to be solved for,” says Theunis.
Is crypto the way forward?
Crypto might not be here to replace traditional finance, but it is certainly carving out its place in the industry. What remains to be seen is who will lead the way forward — new or existing financial institutions.
As Gerald Goh, CEO of Sygnum points out, “We wouldn’t be doing as well as we have been if conventional institutions had been doing their job of banking [crypto] players in the first place.”
The opportunity is clear as day and even if traditional banks pass it up, there will be new entrants who fill up market gaps and drive crypto forward.
Michau believes that it’s a mix of companies working together which will eventually do the trick.
“The crypto ecosystem works best when firms are building infrastructure that works across multiple institutions, supports our community, and lifts everyone.”
“Our house view is that digital assets are a big part of financial services and they’re important to how we continue to innovate,” he remarks.
Featured Image Credit: Ishan Singh / Token2049 Singapore 2023
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