Disruptive Payments: Crypto and Beyond
Cryptocurrencies have exploded in popularity in the past decade. The most well-known is Bitcoin, but there are now several available currencies that can be freely traded, such as Ethereum, Solana, Avalanche, Dogecoin, and more.
None of these currencies are very useful for day-to-day spending–the focus remains on investing in the currency as an asset class. It really resembles commodity investing, where you might buy a certain amount of gold and sell as the price increases. As these cryptocurrencies all sit on a blockchain protocol, namely a basic set of rules that allows computers to communicate and thus creating an open ledger platform. These public ledgers are offering up opportunities for companies and organizations to build new applications above. Many of these new applications leverage the underlying cryptocurrencies as tender to interact with the community or product.
Some of the earliest examples of crypto being used for transaction purposes was as simple as buying a Pizza. More than a decade ago, Laszlo Hanyecz used 10,000 Bitcoin to buy two pizzas. Back then his Bitcoin was worth about $40, but as we write this article, the same amount of Bitcoin is worth about $430,000,000–four hundred and thirty hundred million dollars! Maybe he should have saved the pizza money?
So, today it’s not easy to pay for a taxi or dinner with cryptocurrency, but you can invest and then watch the value of your investment grow as adoption and functionality of these blockchain platforms and cryptocurrencies expands. The use cases and practical day-to-day spend interactions with cryptocurrency are not a reality today but they aren’t as futuristic as one might believe. Today, these currencies have ambiguity and thus are highly volatile. But, as cryptocurrency shifts from its “hype” to leveraging the power of the technology and open ledger for commercial transactions, that is when the real power of cryptocurrency and the blockchain will be established.
The world of crypto is about to change this year though. It has previously only been possible to buy and sell these currencies using specialized investment tools such as Coinbase, Robinhood, or Crypto native exchange. Banks have noticed that their customers are sending large amounts to these brokerage tools and are now planning to make it easier to buy cryptocurrencies directly from a regular bank account. While there is still hesitation from traditional financial institutions around enabling crypto to their existing customers, we are seeing that begin to change through new products and partnerships. The reality is that if traditional financial institutions–especially banks–don’t pivot fast, they may not be as relevant to the financial ecosystem as they are today.
The startup community is already building highly customer-centric solutions, exactly what the customer wants and needs. Traditional financial services organizations need to adopt similar procedures because they cannot afford to ignore the business opportunity–customers are more comfortable in digital transactions and are leveraging tools from the disruptors and the banks will miss out. Startups are not only catering to the native crypto community but the traditional finance community as well through the enablement of purchases of crypto and crypto assets (i.e. NFTs) via ACH and credit or debit cards. This alternative onramp into crypto is seen as a huge opportunity for more mass adoption by consumer of crypto, transacting through a familiar channel such as credit card.
Hundreds of American banks have enrolled in the custody scheme that will allow them to directly offer bitcoin balances and trading options–even smaller institutions like the community bank Suncrest in California, a bank with just seven branches–are enabling this functionality. But these are the exception, not the norm today.
As traditional banks and institutions have begun to rethink their crypto approach as an institution and with their customers, they face the same question as individuals do. Will they "custody" their crypto, or rely on a partner to hold the crypto and private keys on their behalf? This question has given rise to a new UX challenge as institutions will need to develop new partnerships and customer applications while maintaining a frictionless user experience when dealing with third party custodian partners.
Similarly, both traditional and crypto institutions must completely rethink how they think about and implement compliance and governance standards in this decentralized environment. This translates to rigor in financial crime, AML, compliance governance, and also the needs to moderate the policies and content (especially in NFTs) with trust and safety. Traditional processes around customer and asset authentication must be completely rethought for new entrants into their environment or customers who will be bringing their assets with them in the form of a crypto wallet. In addition to onboarding and KYC initiatives, these institutions must also rethink how they protect against fraudulent transactions, many of which take place initially through the transfer of assets from one address to the other or through the purchase of a fraudulent NFT or another digital asset. Now, digital commerce has achieved this generally but with the hypergrowth of this segment, it is an opportunity to leverage our learnings to date in digital commerce and payments into this fast growing segment.
While we spend much of the day hearing about and discussing traditional finance vs. crypto native institutions, it should not be dismissed that these crypto-first organizations will focus solely on crypto currencies, trading, and NFTs. These organizations have already begun offering more traditional financial products including debit and credit cards and will look in the future to more traditional consumer finance products (i.e. lending, mortgages, and insurance) which could be tokenized on a public blockchain. As this happens, you will also see the slow merge of the two: disruptors will look and feel more like banks, and for those fast-moving banks, they will look and feel like the disruptors.
Neither crypto nor traditional financial institutions have a complete suite of financial solutions available to their customers today at scale. In the coming months and years, we will see both sides converge, driving new innovation and efficiencies that will be a win-win for consumers. Those organizations that are able to integrate both traditional and crypto solutions will have a strong foothold to take market share from incumbents on both sides of the debate who are hesitant to expand. As we look at this landscape, we know we have to continue to pivot fast, learn from what we know in the financial services landscape and leverage the best practices to drive the best solutions for consumers.