Cryptocurrency: To risk or not to risk?

• Jul 20, 2022

When it comes to cryptocurrency, there is more interest than there is understanding. One in five U.S. adults are already participating in crypto and another 63% of the population is dubbed ?crypto-curious.? Given it is highly likely that some of your customers fall into one of those categories, it is important for banks to stay up-to-date and be prepared to participate if and when the time is right. How should you go about making that determination? Let?s start by taking a brief look at the history of crypto and where things stand today, followed by the risks associated with offering it and not offering it. A Historical Perspective The concept of cryptocurrency originated during the Great Recession as the promise of an altruistic form of money, centered around the ability to move money digitally, effortlessly, without any government or financial institution and without regard to international borders. It has the potential to disrupt banking services, home buying and car buying as we know it. That said, until just a few short years ago, very few people were talking about crypto. Fast forward to March 2020: Spending on travel, dining and fuel for our cars came to a sudden halt. Stimulus funds were distributed, leaving many consumers looking for somewhere to put this extra cash. The stock market took a sharp tumble, and the bottom was not in sight. Meanwhile, Bitcoin, Ethereum, Dogecoin, Litecoin and many other decentralized cryptocurrencies were, at that time, behaving more like a commodity. Financial advisors began suggesting for the first time that holding cryptocurrency in investment portfolios might be a good thing. The Current Landscape This newfound enthusiasm for crypto has not waned. According to the 2021 Primax Payments Pulse, one in four bank customer respondents were interested in learning more about cryptocurrency from their financial institution. While banks can hold digital assets in their ledgers, the most common service is to offer buy/hold/sell from within a financial institution?s digital banking platform. Offering a digital wallet that can store cryptocurrency coins, stablecoins, NFTs and digital identity is the modern version of a safe deposit box to store coin collections and trading cards. Despite hosting a branded wallet holding the digital assets, these assets belong to the owner, not to the financial institution, much like storing a diamond collection in a physical safe deposit box does not put the financial institution at risk of the price of precious stones collapsing. Recent news of the devaluation of digital currencies and layoffs at cryptocurrency exchanges have led many to question the future of crypto ? is the current state of the industry just a bump in the road or the start of crypto?s decline? While time will only tell, here are various aspects to take into consideration when deciding if participating in cryptocurrency is right for your financial institution. Risks of Offering Crypto Before deciding to dip their toes into the proverbial waters of cryptocurrency, banks should consider the risk of doing so, including:

• Third party ? The third party you choose to partner with may not provide the services customers need or want. Or worse, it could have a business failure or not have insurance to completely cover all losses. The partner may not have the security controls in place to prevent a cybercrime, despite best due diligence efforts by the bank to assess its safety and security.
• Regulatory ? There is a risk that whatever service you are currently allowed to offer later becomes prohibited.
• Reputational ? A customer could potentially invest ? and subsequently lose ? a substantial portion of their life savings in a cryptocurrency buy/hold/sell portal through the bank?s digital banking platform. That customer may then ask the bank to be made whole; when the bank is unable to do so, the trust between the customer and bank will be damaged. The customer may even opt to make his/her displeasure public on social media and other platforms.

Risks of Not Offering Crypto While there are risks associated with offering services related to digital assets, there are also risks of not doing so:

• Competitive disadvantage ? When other competing financial institutions begin offering products like cash back in the form of crypto on a rewards program, your bank may be viewed as not being progressive if you don?t.
• Customer attrition ? By not offering crypto buy/hold/sell, banks risk being intermediated when customers find their way to an exchange. While there, they may discover they can also get a debit card, credit card, loans, better savings rates, direct deposit and more.
• Liquidity risks ? Just about every financial institution is seeing funds flow from their accounts to the major exchanges. The amount of ACH transactions in dollars from banks and credit unions to the exchanges has grown tenfold each year for the last three years, and there is no reason to believe this will not continue.
• Loss of non-interest income ? Banks offering cryptocurrency purchase are realizing non-interest income. Daily interactions by individuals who purchase crypto are twice as high as interactions by those who do not.

There is no one-size-fits all answer to the question of whether your bank should offer crypto services. The consensus of your board of directors, the comfort level of your chief compliance officer, and the make-up and demographics of your customer base are different than every other financial institution. It is still relatively early, and the cryptocurrency space continues to rapidly evolve. Taking a wait-and-see approach is a valid strategy ? however, completely ignoring the trend is not. Having ongoing discussions at the board and senior staff level, following news and developments on this topic, and monitoring the flow of funds on debit cards and ACH transactions from your accounts to the exchanges are all important steps to take now. Leveraging the resources available to you from third-party providers can also be a great first step to stay informed in the evolving digital assets landscape. Lou Grilli is a senior innovation strategist, tasked with building and shaping a superior payment and banking experience capability. Lou is currently focused on real-time payments and cryptocurrency. Lou participates on the U.S. Faster Payments Council and is named on a patent for the use of blockchain for loyalty programs. Lou holds an MBA from Duke, and a master?s degree in Computer Engineering from the University of South Florida.

---