How banks can prepare to adopt crypto
The worlds of crypto assets and traditional finance are becoming ever more integrated. Despite the recent volatility in the crypto market caused by issues with centralised finance (CeFi) platforms, the ecosystem has remained intact. Institutional interest continues to grow and more banks are seeking ways to get involved with digital assets, however, that process hasn’t always proved straightforward
- Private key management prevents banks from adopting crypto assets
- Banks wary of the lack of regulation on cryptocurrencies
- Leveraging API to manage digital assets
Banks looking to enter the crypto market have faced technical difficulties, regulatory issues, and usability. These challenges were major barriers to unleashing the significant pent-up institutional demand for crypto.
Things are beginning to change for the better, as more solutions are coming to the market to offer a seamless on-ramp for banks to begin trading and investing in digital assets. They are addressing these concerns with solutions tailored to the needs of mainstream financial institutions.
Private key management prevents banks from adopting crypto assets
Private key management has emerged as one of the thorniest issues preventing more banks from adopting crypto assets. Control over private keys, which allow users to access their assets on blockchain platforms, is relatively straightforward for retail users.
Individuals can simply self-custody their crypto, bypassing the need for involvement of third parties such as exchanges. For banks and other financial institutions which require numerous layers of governance and controls, this has proved to be a roadblock.
To meet regulatory requirements, banks need a custody solution, which allows them to implement institutional policies that govern how funds are accessed and transacted while maintaining security. Institutions can set up their private keys, as a flexible governance layer using the network’s decentralised multi-party computation approach, keeping full control over access without a need for a trusted third-party intermediary.
Making crypto accessible and usable for banks is one of the biggest challenges facing the industry. But with more flexible custody solutions, improved governance, and infrastructure rails which can be integrated with pre-existing systems, there are more ways than ever for banks to begin their journey into crypto.
Banks wary of the lack of regulation on crypto
With governance in mind, there is one issue that stands out to banks: regulation. Over the past few decades, compliance has become one of the most important functions within financial institutions, especially since the 2008 financial crisis, as regulations proliferated in all major jurisdictions.
For many regulated institutions, past issues within the crypto asset market and the lack of clarity around the industry’s regulatory position has put many off getting more involved, even as the scale of the opportunity continues to grow.
Now, many major markets including the US, Japan, Singapore and the UK have implemented clearer regulatory regimes for digital assets, and that in turn is prompting renewed interest from institutional investors who need a well-defined framework in which to operate. That however, doesn’t fully address the issue at hand.
With know-your-customer (KYC) and anti-money laundering (AML) guidelines which require them to have complete oversight over the origin, destination and ownership of the funds they handle, banks need more than just regulation.
Leveraging API to manage digital assets
Crypto’s pseudonymous infrastructure poses significant KYC challenges, but there are now dozens of solutions available to banks to maintain the necessary controls while handling digital assets which are embedded as part of compliance controls for this new asset class.
The ability to track and investigate transactions using application programming interfaces (APIs) that are easily integrated with banks’ pre-existing systems can help firms more readily embrace crypto assets, all the while secure in the knowledge that they are meeting their regulatory obligations and covering all bases for security. Overall, we are only at the beginning of the integration of traditional finance and the emerging economy of crypto. As confidence grows, technical barriers fall and a more stable regulatory regime emerges, and there are plenty of reasons for banks to embrace crypto assets.
Josh Goodbody is the chief operations officer at Qredo, an infrastructure provider of multi-party computation (MPC) custody and wallet solutions.
Views and opinions expressed in this opinion-editorial belong strictly to the authors/contributors and do not reflect that of The Asian Banker.
Country: United Kingdom