How to prepare for the moment when cryptocurrencies come of age

The buzz around cryptocurrencies continues to gather pace. Bitcoin, Ethereum and Dogecoin are all hot topics of conversation in many swathes of the global population. And, it’s not surprising when you see increasing take up and support from global brands, leading business people, and governments. El Salvador has just made Bitcoin legal tender, promoting its use by giving citizens who sign up for the national digital wallet $30 in free bitcoins.

But, there are the doubters when it comes to cryptocurrencies moving into the mainstream. There’s a real divide between those who see cryptocurrencies as the future of Decentralised Finance (DeFi) and payments, and those who think they are far too risky to have a place in the heavily regulated market that is mainstream finance.

With so much uncertainty, how should financial institutions be preparing for the future in these fast-changing times, and will the post-Covid landscape see the adoption of cryptocurrencies on a much larger scale?

Huge opportunities

The crypto boom is no coincidence. Following the pandemic, large retailers are increasingly determined to move to a 100% cashless model. For them, the cost of handling cash across thousands of different stores is an added expense that they want to divest. Moving to more digital payment structures, including the adoption of cryptocurrencies, is a path many will start to follow over the next year.

There are also considerable security benefits too. The cryptographic certainty of cryptocurrencies adds an extra security layer for financial institutions by eliminating forgery risk or counterparty risk that any other current financial instrument has today. Just as digital infrastructure, protocols, and processes help financial institutions protect against scams and money laundering with assets, crypto could offer a more secure and scam-proof model.

Perhaps most important of all, cryptocurrencies enable greater international cooperation: a fixed, known, and pre-defined monetary policy. More than that, every international participant can join on an equal ground, since it’s a policy with a financial instrument representation that can be transferred in a fully decentralised and permissionless way. This can open up huge new opportunities for international commerce, since it’s the only type of neutral financial instrument in existence where trust-less cooperation is possible.

Accepting crypto

Despite criticism about the volatility of cryptocurrencies, they are nevertheless gaining ground – and at rapid pace. If established financial institutions don’t find a way to incorporate this technology into their offerings, they will miss out – big time. The good news is that this is the perfect time to start. Covid-19 has forced many to challenge their current business paradigms and find better and more efficient ways of doing business. For cryptocurrencies and underlying blockchain technology, we’re on the cusp of a real gold rush.

So, what do financial institutions do now? The first step is for financial institutions to create financial instruments that are more and more based on established cryptocurrencies, like bitcoin. Many start with offering custody services, or additional investment options either directly or through vehicles like Funds, Trusts or ETFs. A financial institution could even offer a credit system based on a collateralised loan, which is then used to make the payment in the currency of choice.

For central banks, they are looking at a digital currency similar to cryptocurrencies as a way to enable fast changes in monetary policy and a better view of overall financial health and the usage of its currency. We should see this approach happening across many jurisdictions over the next few years.

Just the beginning

Cryptocurrencies are gaining a solid ground in the payments and transactions arena. And with that, its underlying technology is inspiring massive changes in monetary policy. Thus, the growing demand for various cryptocurrencies will continue until we see the usage of crypto go well beyond the realm of payments and transactions. Only the financial institutions who embrace crypto and explore its full potential will be the true drivers behind a new world of commerce, which they can reap huge benefits from.


By Young Pham, Chief Strategy Officer, CI&T

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