Examining pros, cons of banks and cryptocurrency

I first heard about bitcoin while sitting in a college classroom for an Informatics class, an interdisciplinary track that aims to bridge computer science with other professions. My professor described bitcoin as a currency powered by algorithms which ensured both successful confirmations of payments on an immutable blockchain and production of new bitcoin through mining. At the time, bitcoin's value was still relatively low, barely reaching a few hundred dollars at best, and my professor described bitcoin as an alternative currency that users hoped would one day replace traditional government-backed fiat currency.

We have certainly come a long way since those simple days. Whereas before bitcoin was mainly a topic of underground libertarians on internet forums, now investment experts discuss cryptocurrency investments with senior citizens. In addition, banks, once considered the sworn enemy of bitcoin, are now beginning to adopt cryptocurrency assets.

For example, Mastercard announced a program to help banks integrate cryptocurrency. In particular, the company bridges Paxos, a cryptocurrency trading platform with banks.

Jorn Lambert, chief digital officer for Mastercard, said banks can help make customers more comfortable with interacting with cryptocurrency.

"There's a lot of consumers out there that are really interested in this, and intrigued by crypto, but would feel a lot more confident if those services were offered by their financial institutions," he said in a press release.

However, should banks be jumping into cryptocurrency? Or is this a trend banks should avoid? Let's take a look at the pros and cons.

Pros

First, cryptocurrency is hugely popular and that trend continues to grow. According to Buy Bitcoin Worldwide, there are an estimated 106 million bitcoin owners worldwide, with 400,000 daily users, 200 million bitcoin wallets and 53 million bitcoin traders. With such a larger user base and demand, financial institutions should certainly consider bitcoin.

Second, financial institutions are fighting on multiple fronts to keep loyal members. As multiple Bank Customer Experience Summit keynotes have brought up, customers are in a more contemplative headspace post COVID-19 and they want financial services that meet their unique needs and desires. As a result, they may turn away from traditional banks to fintechs or neobanks that do offer services such as cryptocurrency investments or trading.

Banks can improve their standing with these users by integrating cryptocurrency. This can also help transform their brand from a more traditional conservative institution to an innovative one.

Third from a portfolio perspective, financial institutions owe it to their clients to at least discuss cryptocurrency as an option. While it can be quite risky, it can also deliver high returns. By facilitating cryptocurrency investing, banks can help protect clients from being harmed financially while maximizing benefits.

Cons

One of the most obvious cons is that cryptocurrency is a highly volatile asset. One need only look at a chart of bitcoin's price over time to see that. There's also the issue of the currency "crypto winter" which has seen massive dips in prices, with bitcoin in particular going from a high of nearly $50K earlier this year to just under $20K currently.

Both traditional banks and their customer base may be turned off by this volatility and inherent risk in cryptocurrency.

However, the biggest con for banks is the security and regulatory aspect. Financial institutions are slow to innovate when it comes to adopting cutting edge tools in fintech due to concerns over regulatory compliance and that certainly applies to cryptocurrency as well.

For one, there is severe uncertainty and confusion over cryptocurrency that bleeds over into federal, state and local guidelines, which can often change at a moment's notice. In addition, there are many concerns about criminal activity with cryptocurrency, as organized criminals will often utilize it for extortion, money laundering, drugs and other illegal activities

It is quite understandable banks may choose to street clear of cryptocurrency considering this huge hurdle.

Final thoughts

That being said, payments vendors and trusted cryptocurrency providers are working to make it easier for financial institutions to adopt cryptocurrency, such as Mastercard's partnership which aims to handle all the security and regulatory issues internally.

This indeed appears to be the path forward for many banks, who are dipping their toes into crypto by outsourcing the actual difficult elements to outside parties.

In many ways, this follows the trend toward fintech partnerships, where traditional financial institutions partner with fintechs to utilize their innovative solutions rather than build them from the ground up.

While cryptocurrency will continue to go up and down in value, it isn't going away anytime soon and as a result banks will have to interact with it on some level. How far that interaction will go will be on a case-by-case basis.