On Wednesday (July 22, 2020), the U.S. Office of the Comptroller of the Currency (OCC) announced that national savings banks and federal savings associations can provide cryptocurrency custody services to their customers. For those who don’t know what the OCC is, they’re the financial regulatory agency in the U.S. that:
- Is an independent bureau within the U.S. Department of Treasury
- Regulates the U.S. banking system
- Enforces anti-money laundering (AML) and anti-terrorism finance laws
That’s a big deal for banks and the crypto industry. In the next few years, we’ll see “Bitcoin” in our Chase and Citi online bank accounts. But that’s not all — because of the potential profits and importance of deposits to banks, we’ll see banks eventually offer customers the option to buy Bitcoin (like Square) and collateralize their Bitcoin to take out loans (like BlockFi).
The question is not if but when.
Two Years Time to Market
Sorry to rain on the parade, but there is a lot that still needs to happen between now and when banks will be able to offer crypto to their customers. In reality, most banks don’t know the first thing about crypto, how to custody or provide crypto-powered services to their customers at scale, or what is needed from a tech, op sec, or legal/regulatory perspective to turn crypto on.
Unfortunately, most banks’ knowledge is more theoretical than practical at the moment, as they haven’t been working with decentralized, public cryptocurrencies like Bitcoin or Ethereum in live production-level environments — they’ve instead focused on pilots of permissioned blockchains within highly guarded test environments.
As such, banks today don’t have the talent or capabilities to do much with this new regulation, as big of a deal as it is. But banks are getting started now if they haven’t already. You can bet teams will be scrambling over the weekend after seeing the news and getting an email like this:
Realistically, it’ll take banks 3 months to designate a leader and setup a task force, 3 months for that task force to research and develop recommendations, 3 months for senior executive approvals and budget, 3 months to setup the execution team, and 12 months to get something in market — including testing, cybersecurity, infosec assessments, and legal/regulatory sign-off.
So that’s 2 years… At best.
If they’ve already been working on it, some banks will be able to get into market in 12 months, but that’s if they have a really strong team and their ducks in a row. It’ll take 3-4 months to get through risk and regulatory approvals alone after the solution is built.
If there is any bank that can do it first, my bet is on J.P. Morgan. But even still, they’ll move very slowly and cautiously. Fidelity started mining Bitcoin way back in 2014 and only launched its custody business — Fidelity Digital Assets — five years later in 2019. It took a ton of work to figure out secure custody at Fidelity’s scale. (Fidelity and its digital asset team were one of the founding members of IDEO CoLab in 2015 which birthed our crypto fund in 2018.)
What Does This Mean For the Crypto Industry?
Two years may sound like a long time, but in the grand scheme of things it’s not. Especially as many changes will be put in motion in the next 12 months. Here’s how I see things playing out from here:
Banks Will Focus on BTC and ETH Initially
Let’s be real. For the foreseeable future, banks won’t touch anything other than “safe” large cap cryptos like Bitcoin (BTC) and Ethereum (ETH) — and potentially things like Libra and USDC. I predict that’ll be the case for at least 18–24 months after banks turn on Bitcoin (yes, Bitcoin will be first) 2 years from now.
That means you won’t see banks support other large cap cryptos or alts for 3-4 years from now, if ever. Banks have much bigger fish to fry than listing the hottest new alt with a market cap of $300 million, $1 billion in annual trading volume, and $30 million in total trading fees. Citigroup’s annual revenues are $74 billion a year. But they’ll be happy to take as deposits your BTC or ETH.
Because it’ll take 3-4 years, don’t expect BTC or ETH prices to spike (yet), and certainly don’t expect this to have a material impact on alts any time soon. But 1-2 years is plenty of time for folks to get invested before banks step in and things take off. (Not investment advice.)
Now is a Great Time for Crypto Infrastructure Providers
Now that banks are going to turn anywhere and everywhere for help and external solutions, the next 2 years will be a great time for crypto infrastructure providers like Anchorage, Coinbase Custody, BitGo, Fidelity Digital Assets, Ledger, FalconX (trading), Blocknative (transaction monitoring and assurance), Chainalysis (AML monitoring), OpenZeppelin (cybersecurity), Blockdaemon (nodes), Transparent Systems (payments), and Bison Trails (staking).
Banks will opt to “buy” and “partner” rather than “build” capabilities to accelerate their time to market. Over time, we’ll likely see financial institutions like J.P. Morgan and Bank of America, fintechs like PayPal and Square, and traditional financial infrastructure providers like Nasdaq and Fiserv make strategic acquisitions of top companies in the crypto infrastructure space as tech and talent are hard to find.
Crypto Challengers Should Grow Fast While They Can
The next two years will be the window for crypto challenger banks and startups to build a substantial lead in their customer base and capabilities before traditional players like banks and fintechs enter the game. This includes larger crypto companies like Coinbase and BlockFi, as well as high growth crypto companies like FalconX, River Financial, and Flexa.
Even when banks enter the crypto space a couple years from now, it’ll unfortunately be unremarkable things like “show how many Bitcoins I have” or “buy Bitcoin” (but no external transfers or interactivity with DeFi) through your online banking portal. That means DeFi (Decentralized Finance) and everything that DeFi will enable (i.e., the coolest stuff, like Foundation and Zora) will remain far outside the scope of banks. So crypto companies shouldn’t be too worried, about banks at least (more on this in a second).
There’s also an opportunity for startups like Avanti and others that are building neobanks on the crypto stack — the question here is how they’ll differentiate once traditional players with outsourced crypto capabilities/services come online. Time will tell.
Crypto’s Biggest Threat: Traditional Fintechs
To me, the biggest threat to existing crypto startups is the entry of existing non-crypto traditional fintechs — built on banks — like Revolut, Monzo, Venmo, PayPal, Robinhood, Stripe, Brex, and Square.
Consumer crypto apps and platforms targeting mainstream consumers and businesses for more traditional use cases like payments, savings, credit, investing, and commerce could face stiff competition from traditional fintechs with large customer bases, deep pockets, talented engineering teams, and partnerships with crypto infrastructure providers — like Revolut’s recent partnership with Paxos to offer crypto trading to U.S. customers.
We’ll see many more of these partnerships, so while we may see acquisitions and acqui-hires of smaller crypto startups, it may mean that the bigger, more valuable crypto projects to emerge will be DeFi protocols, platforms, and services like Aave, Compound, MakerDAO, Curve, Uniswap, Balancer, InstaDApp, and PoolTogether — things that fintechs and banks will never structurally be able to do.
This is Banks’ Blockbuster vs. Netflix Moment
Earlier this week I mentioned that traditional banking is on the cusp of having its “Blockbuster versus Netflix” moment. The OCC’s announcement is a key part of this inevitability.
In all three cases (Kodak, Blockbuster, Citibank), senior executives at those companies thought the initiates didn’t present long-term existential threats to their industry or business. But as we all know now looking back, tech merely helps enable and serve higher order human wants and needs around access, convenience, and experience. The world always wanted digital photos and movies streaming over the Internet—whether Kodak and Blockbuster built it or not.
The world wants and needs natively digital money and open financial services, whether banks like it or not. At this point, there’s no stopping it— now the OCC is giving banks the permission to go after it too before it’s too late.