Last Chance for Banks to Start Developing Infrastructure for Crypto Assets
Cryptocurrency is being widely adopted across the globe in numerous industries. Sectors that may seem too far away from having anything to do with crypto get down to adopting it on all levels, including carrying out payments. Yet, for mainstream acceptance crypto requires specified infrastructure to ensure compliance and safety.
Digital assets are warmly welcomed all over conventional legacy systems. In July of this year, U.S. banking regulating authority the OCC gave a green light to all federally chartered banks across the United States to provide crypto asset custody services. The financial markets mature and become technologically advanced, which raises the need for new approaches and innovative solutions to be recognized and used within the industry.
Custodying cryptocurrency became the first major step on the way to digital finance merging with the traditional financial sector. It will definitely be beneficial for finance as a whole, but the existing technology and infrastructure must be thoroughly assessed and adjusted to the new reality for questions like “Where can I store my crypto assets?” to be answered at once.
The only thing that is certain is that the financial system has reached the point of no return, and from now on it requires new approaches and tools for digital assets to be managed properly and securely.
Crypto assets can bring astonishing wealth to the industry, but companies providing crypto custody are liable for their clients’ safety from fraudulent actions and hacker attacks that happen from time to time in the crypto space and already hit $1.4 billion in total this year.
Following the research of FATF, the immature infrastructure of the whole industry negatively impacts its conformity properties and safety of assets management. As conventional financial authorities start accepting crypto and integrating it into their everyday performance, they come to understand the need to develop compliant and powerful technologies alongside that would be legally supported and protected.
Lifting Restrictions for Banks to Provide Crypto Custody is a Good Step Toward the Digitalization of Finance
When it was announced by the Office of the Controller of the Currency (OCC) that the national bank can provide custody services by holding unique cryptographic keys linked to cryptocurrencies, US banks became highly interested in the matter. This decision marked the industry’s biggest milestone so far, paving the way forward for further development and growth of financial markets, which will also expedite advancement and certainty of regulation systems within the space.
Banks are the ones benefiting most from the move as now they have boundless opportunities to significantly boost the wealth of millions of people around the planet by providing custody services. These newly emerged opportunities raise financial accessibility and affordability and protect immature economies from crashing.
But this must be done in a proper way, using due risk assessment techniques and assessing the ways to adhere to local and foreign legislature as well as understanding how to bear liability for other people’s digital assets.
Traditional Banking System Is on the Verge of Radical Changes, and It’s Do or Die
The revolutionary changes that are now happening in the traditional banking system bring to the surface the confrontation of conventional banks and fintech technologies, a parallel similar to that of Pony Express and modern money transfer services like Western Union. Pony Express was a US widely used mailing service back to the 19th century. It delivered messages across the country using horse-and-rider relays. With time, evolving American society needed a faster and more reliable service, so the times of Pony Express soon terminated and was replaced with more scalable services.
Traditional banks and modern fintech solutions now go in parallel and represent the above-mentioned Pony Express and Western Union. The new and the old financial systems will be used simultaneously, but based on completely different mechanisms, as different as horses are different from cars. Perhaps society will mature to an extent where the traditional approach will have to be fully replaced by the new one, but it’s only guesswork for now.
Innovations usually bring about positive results, but they can also be destructive, especially when introduced unexpectedly or without due preparation. It must be taken into account by banks and financial markets to successfully merge the existing financial institution with a trendy crypto move. It’s a very important moment for fintech that is obliged to get on stage and guide the banking system to the right direction.
Finance is developing fast, and banks must evolve along with the emerging challenges and apply appropriate regulative and secure technologies, otherwise assets can end up in danger.
With a New Era of Digital Finance Stepping Up, Banks Must Adjust to the New Reality
The first step that banks should take to stay up on the market is to understand how exactly the industry of digital assets works. They must get acquainted with smart contracts and their abilities to exchange one cryptocurrency for another without centralized intermediaries. It’s an innovative technology that won’t be too friendly with the traditional mechanisms.
It is highly likely that the two systems will work in parallel for the foreseeable future where users will be able to benefit from infrastructure and instruments that operate in a much different way compared to traditional ones. It will firstly refer to the sector of payment networks. The main reason for their inability to merge into one more advanced system is the existence of numerous contradictory elements underpinning these systems that can’t be changed anyhow. Therefore, the only right choice that banks have to make is to adopt the new mechanisms.
One of the basic precautions that the banking system must consider is that they can’t move fast on it. Accommodating new technologies takes some time, and it must be taken as required, otherwise technological issues may arise and users can face poor service. As for custodians, their primary goal is to develop a system of cyberattack-preventing measures to ensure the safety of the assets’ storage, a property very much valued today as the amount of fraud is on the rise during the pandemic.
Banks are obliged to find solutions to protect themselves and their clients from hackers without having to spend half of their budget on it. The backbone of the revolutionary changes that are happening right now lies in realizing that digital assets are significantly different from traditional assets by definition and must be dealt with accordingly.
Managing digital assets is a highly risky venture. If the assets are not dealt with correctly, it may lead to serious troubles. A deep understanding of the industry and qualified staff are required from the start.
To Create or to Purchase? Custodians Must Make a Decision — the Quicker the Better
There’s no doubt that the decision of OCC is by all means beneficial for everyone across the industry. Yet, most banks are not ready to adopt these changes simply because they lack the necessary infrastructure to deliver secure and yielding custody to their clients.
Banks have the wonderful power to speed up transactions and ease settlements and trades. They can also be very helpful in record keeping and tax management, but it’s still unsure how they will manage all these tasks along with risks following them. It’s impossible to bring more revenues and yields to the crypto market and adopt newly emerged technologies to the conventional financial systems without omitting counterparties in the trading process and the risks that the counterparty may fail to execute the terms of the contract.
Banks wishing to provide custody services will require proven digital asset instruments tailored specifically for the sector. They will also have to come up against a decision-making process on whether to create the necessary tools themselves or purchase them. If banks decide to create it from the very beginning, they need the appropriate technology to ensure safety of the assets.
Once that technology is obtained, it must be properly implemented. This process is both complicated and costly. A team of skilled experts will be needed who would carry on research and recommend how to make the implementation more effective, run tests on technologies, and ensure anti-fraud safety measures.
As surprising as it may seem, this process can take years. Any attempts to make it faster can end up destructive to the users’ assets. There’s always a possibility to incorporate already existing infrastructure specifically tailored to protect, regulate, and ensure the safety of crypto assets where asset security is of the highest importance.
It is not cheap to build infrastructure that would conform with crypto assets, but the potential wealth it can bring may well be worth it.
Conquering New Horizons With a Risk-Free Itinerary
It’s no surprise that banking systems and financial authorities are incredibly slow at adopting innovative solutions, but it should never impact negatively on their customers.
The sector of cryptocurrencies and fintech develop at an unimaginable speed that is sometimes too fast even for those considered to be the most skilled and talented experts in the industry. And banks must find a way to join this move and keep up with the ever-developing tools, solutions, technologies, and software.
The appropriate infrastructure must emerge as soon as possible. The sooner the global community realizes that the traditional banking system and its fundamental serving facilities are outdated, the sooner banks must accept their inconsistency with the current trends and start a digital evolution to provide its customers with a protected financial future.
Those only entering the digital assets sector must find a way to realize how to bear risks, adhere to international legislature and local norms and, most notably, carry responsibility for the assets of their customers.