Whether banks will collaborate with crypto firms in the future may not have a straightforward answer.
The definitions of "crypto" and "banking" vary widely, making it challenging to provide a definitive response. While "bank" encompasses diverse entities, from small, local institutions to financial giants like JPMorgan Chase and Goldman Sachs, the term "crypto" is even broader and may or may not connect to pre-existing regulations and financial products.
Understanding the different aspects of new technologies and how they extend existing financial systems is essential for fostering a healthy relationship between banking and emerging technologies. Although "crypto" lacks established definitions, crypto-related activities are subject to regulations, such as trading and selling investment products. Consequently, labeling these activities as "crypto" can be distracting and hinder productive discussions.
To overcome these challenges, viewing crypto or blockchains as a technology that extends financial infrastructure rather than a replacement is essential. Only then can we better understand the synergy between banking and new technologies by focusing on the technology's potential to enhance existing financial controls and laws.
Technological advancements have consistently transformed financial experiences, such as online banking, mobile banking and embedded finance. While smaller banks may need more resources to operate full-scale fintech programs in collaboration with large cryptocurrency exchanges, their customers likely interact with fintech applications or trading firms like Coinbase or PayPal already. These applications offer crypto-related services but are distinct from things like decentralized exchanges, so they don't belong in the same paragraph in my opinion.
But, again, when throwing around a word like crypto, it's easy to get distracted. Educating decision-makers within banks about these differences is crucial to avoid erroneous judgments that could hinder innovation.
Beyond cryptocurrencies, "crypto" also refers to cryptography, the mathematical techniques that protect sensitive information like credit card numbers. Unfortunately, many banks lack the necessary controls to implement cryptographic standards effectively, which becomes a critical concern when handling customer financial data. Proper security measures, such as Soc2 and PCI certifications, should be required for any financial institution dealing with card data or personally identifiable information. Crypto in this context is obviously needed.
In discussing the future relationship between banks and crypto firms, it is crucial to establish a clear understanding of the terms being used. Misconceptions can hinder progress and create barriers. Crypto, as it is currently perceived, faces branding challenges and misunderstandings.
However, appreciating the potential benefits of new technologies requires time and a willingness to explore new possibilities. It is unwise to dismiss these technologies, as they are becoming an integral part of the financial landscape. They are likely to impact banking the same way the internet or the digital core has.
Rather than seeking a definitive answer to whether banks will work with crypto firms, the focus should be on how financial services can leverage new technologies to expand their product offerings responsibly.
The continuous growth of financial ecosystems and the increased economic value resulting from enhanced accessibility are positive indicators for the future. It is essential to recognize the hard work and innovation that have paved the way for new technologies while remaining open to evolving approaches. This is the way modern banking has always evolved alongside innovations.
ACH, an unstoppable technical innovation from the 1970s, laid the groundwork for constant innovation for the last 50-plus years. Let's appreciate that there was a time when ACH was in the same state FedNow is today. What an incredible enabling technology. It wasn't that long ago that I was spending most of my time talking about real-time, and even 10 years ago, it was like heresy in the wrong audience. Soon, the entire market will get access to FedNow. What we often see as past innovations are effectively the things that created the opportunity we have today. They laid the groundwork.
In reality, banks are already engaging with crypto firms to varying degrees. The extent of collaboration and participation remains to be seen, just as it did with previous technological waves. Some relationships are passive like we see with most banks whose clients might use PayPal, Coinbase or Cash.app. Some are much more active like we see with JPMorgan Chase's blockchain platform, Onyx.
It's not up to me to say which is right or wrong, but it does feel fair to say it's possible to do the right thing while using new technologies that create opportunity.
