African Banks Have An Urgent Need To Leverage Crypto

This research was sponsored by Luno, a platform that allows users to buy, save and manage cryptocurrencies.

Cryptoassets and existing monetary systems have been a challenge for African policymakers.

These countries have been unable to keep up with such financial innovations, for example failing to offer a regulatory framework, or alternatively, allowing Crypto trading among African banks.

Private crypto providers are becoming a prominent part of the continent’s economy, and central banks like Nigeria’s have been developing their own digital fiat currencies, as the appetite for them has soared.

High cash costs have also contributed to the growing popularity and adoption of digital currencies across Africa — a catalyst for social upliftment and development.

Clients of retail banks and institutional investors are attracted to these innovative assets and the distributed ledger technologies, for example blockchain, that provide their foundation.

FinTech firms, venture capital funds, and other industry participants are beginning to make sustained investments in cryptocurrency, regarding it as the future of money. Banking institutions cannot ignore this phenomenon any longer.

Cases against African banks adopting crypto

Bitcoin is a decentralized digital currency that operates without a central bank or administrator. Harnessing its peer-to-peer network, users can send cryptocurrency to one another without the need for an intermediary.

In the past, global banks have been reluctant to embrace cryptoassets for a variety of reasons. That’s why the rise of bitcoin, for example in the area of remittance, has attracted attention from traditional financial institutions.

African Banks also remain skeptical of bitcoin, and for a variety of reasons.

The risk that bitcoin poses to traditional banking systems continues to grow as the digital currency’s popularity continues to soar.

As recently as 2017, Jamie Dimon, the Chairman and CEO of JPMorgan Chase & Co., labeled bitcoin a “fraud” and threatened his staff with termination if they traded it. Adding insult to injury, the prominent American banker called the virtual currency “stupid” and “far too dangerous.”

The digital currency’s innovative technology threatens the global monopoly held by banks, which is why these financial institutions are concerned.

Banks have other reasons to be cautious, of course. Bitcoin has been linked with nefarious activities, for example hacks and money laundering, which have not been positive for its reputation.

Top financial regulators have warned investors against cryptocurrency initial coin offerings (ICOs). The U.S. Securities and Exchange Commission, for example, cautioned investors regarding these token sales, emphasizing that “the markets for these assets are less regulated than traditional capital markets.”

However, this situation appears to be slowly changing over time, as key stakeholders work together to develop a more mature, better-coordinated framework for digital assets.

Global banks are taking the lead

Money always passes through banks in centralized financial systems. However, since cryptocurrencies provide an effective, efficient, and decentralized way of making transactions, more people are becoming interested in using them.

At first, centralized financial institutions presented many arguments against crypto, but over time, a large number of them have gotten involved with digital currencies.

Already, a wealth of global banks, like Morgan Stanley, JPMorgan Chase, and The Goldman Sachs Group Inc., have started offering digital currency related services to their customers.

Consequently, these leading banks are also getting involved in the emerging crypto and blockchain industry by providing early- and late-stage funding to companies and projects in the field.

Blockchain market intelligence firm Blockdata found that 55 out of the top 100 banks, as measured by assets under management, have at some point gained exposure to digital currencies and/or blockchain technology. More specifically, these major financial institutions, or their subsidiaries, have invested in such opportunities.

JPMorgan Chase, for example, launched JPM Coin in 2019, which the company uses primarily for funding transfers and faster settlements across client accounts.

Morgan Stanley has taken an interest in blockchain since 2018. In 2020, Goldman Sachs appointed a new executive to oversee digital assets, an indication that it expects activity to increase.

Mainstream banks outside of the U.S. are providing ways for customers to invest in and store bitcoin and other digital assets.

In addition to its operations in Latin America and Turkey, Banco Bilbao Vizcaya Argentaria, S.A., the second-largest Spanish lender, allows its customers to hold, buy and sell ether and bitcoin through a digital account.

Commonwealth Bank, Australia’s largest bank, launched a pilot program for similar services late last year.

Banks may not have much time left to avoid being disrupted by crypto-focused competitors. A number of technology players like Binance, Coinbase, Ripple are entering the market.

However, both the big banks and regional banks have a chance to break into this market, gain a first-mover advantage, and earn the impressive margins that come with any differentiating and profitable product.

These banks are often trusted because they have a track record of protecting the assets of their clients.

How African banks can tap the benefits of Crypto

Custody services

With today’s ever-increasing use of digital currencies, cryptoassets can assist banks in boosting their competitiveness. Thus, these financial institutions need to be aware of how they can harness cryptocurrency related services to attract new clients.

African banks providing crypto custody services are essential for meeting the needs of all industry participants who are interested in using digital assets, as well as for capturing new business opportunities in a market that has substantial room for growth.

Remittance

Cryptoassets like bitcoin or ether are produced using their respective networks, which can in turn be harnessed to send and receive money. Because transactions take place via these networks, it eliminates the need for trusted third parties, allowing people to make payments easily and cheaply around the world.

By eliminating intermediaries, payments are settled faster. By using bitcoin, near-instant settlements are made possible.

A bitter battle is underway in the field of cross-border payments. A growing number of firms, led by Ripple in San Francisco, are seeking to use blockchain technology to cut costs and time, with SWIFT, the bank-owned messaging system, as a focal point.

A Ripple product, xCurrent, allows banks to communicate more quickly and in real time, allowing them to settle and message in real time.

Finance for trade

The prolonged and complex process of acquiring financing and completing trades in global markets is hampered by friction.

When traditional practices are followed, which includes lending, issuing letters of credit, factoring and insuring the parties, completing a transaction can take several days or even weeks. Paper documents need to be validated and reconciled back and forth, which ties up capital and slows the business.

The blockchain enables trade partners to interact more freely and effectively, improving the ability of businesses to access funding and reducing time and costs throughout the trade process.

Identification

Banking relies heavily on customer and counterparty verification. It would be difficult for lenders to be trusted custodians of people’s money without it. Banking regulators hold banks responsible for ensuring that their customers are not criminals or illicit actors, and they fine them if they fail to do so.

Several banks have been working on setting up a digital utility for keeping track of customers’ identities.

Conflicting demands and the difficulty of deciding liability have prevented them from finding a solution. The blockchain may be able to provide solutions due to its cryptographic protection and ability to share continuously updated records between different parties.

Infrastructure

Furthermore, blockchain gives banks an opportunity to streamline complex processes and optimize internal workflows. There is still a significant amount of manual work in the banking industry, as banks use siloed systems. With the help of blockchain, critical infrastructures can connect more effectively, and large amounts of data can be exchanged immediately instead of going through a manual process.

Banks must come up with their own guidelines, because there is no clear universal regulatory framework. First, they should conduct a gap analysis and create a regulation heat map.

As part of the combined effort, relevant regulations should be covered, future changes should be anticipated, and regulatory gaps (that is, the differences between existing requirements and potential changes) should be identified in each region.

The second step is for banks to develop a risk management diagnostic based on their own activity. This might include identifying and prioritizing cryptocurrency initiatives.

In addition, they should take a look at the technology and expertise needed to meet these priorities.

Compliance implementation plans must be created in order to meet current and anticipated regulations. To be able to retrieve the work in the future, it is also necessary to establish a process for archiving key milestones.

Further, banks need to develop risk management solutions to handle their own transactions. Past that, they might sell these solutions to other entities, such as exchanges, to help finance their operating costs. Taking these steps can help them reduce risk significantly and ensure compliance with current and future regulations.

It is not possible to design and implement a universal strategy for this, but those banks who are first to do so will lead the industry.

Conclusion

African banks cannot afford to leave their recovery to chance given the uncertain trajectory of this pandemic. A McKinsey study estimates that by 2024, African banks could lose over $48 billion in post-risk revenues, unless certain risks are managed properly.

This could result in the financial institutions producing returns that fall short of the cost of capital for several years.

At this stage, restricting the African banking sector and preventing its industry participants from using cryptocurrencies and related technologies would be counterproductive, because it would undermine financing of critical sectors like small- to medium-sized businesses, affordable housing, and remittance payments, which are needed the most by Africa.

This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

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