Banks continue to show interest in digital assets and DeFi amid market chaos

The cryptocurrency sector is the Wild Wild West compared to traditional finance, yet a number of banks are showing interest in digital assets and Decentralized Finance (DeFi). This year in particular has been remarkable for banks exploring digital assets.

Most recently, JPMorgan demonstrated how DeFi can be used Improving cross-border transactions. This came shortly after BNY Mellon – America’s oldest bank – announced the start its Digital Asset Custody Platform, which allows select institutional clients to hold and transfer bitcoin (Bitcoin) and ether (ETH).

The Clearing House, a United States banking association and payments company, given on November 3rd that banks “should not be less able to engage in activities related to digital assets than non-banks”.

Banks recognize potential

As banks continue to show interest in digital assets, the 2022 BNY Mellon Survey of Global Institutional Clients shows increasing demand from institutions seeking access to digital assets through reputable custodians. To According to the survey, almost all of the 271 institutional investors (91%) are interested in investing in tokenized assets. The survey also found that most of these investors use more than one custodian, with 35% doing business with traditional incumbents.

Increased demand from institutions seeking access to digital assets is one of the reasons banks are showing interest in cryptocurrency and DeFi offerings.

Bobby Zagotta, CEO of Bitstamp USA — a cryptocurrency exchange founded in 2011 — told Cointelegraph that Bitstamp has recently received many inbound requests for its Bitstamp-as-a-Service offering, which allows fintechs and traditional financial institutions to give clients access to to grant cryptocurrency.

“Last year, fintechs asked Bitstamp about cryptocurrency support services. This year, fintechs have been discussing the downside of not giving clients access to digital assets. Banks are realizing there is a customer demand to buy and sell crypto, and if people can’t do that with their banks, they will go elsewhere,” he said.

Zagotta added that banks that are currently not looking to implement digital asset offerings will lose market share: “Banks realize that if they don’t come to market with crypto offerings, they could create a customer retention problem.”

According to Zagotta, BNY Mellon’s survey found that 65% of institutions are currently collaborating with digital-native platforms rather than traditional financial players. However, BNY Mellon’s results also show that 63% of appraisers would accept longer settlement times to transact with a highly rated traditional institution.

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Additionally, some industry experts believe that large banks can boost their operations by implementing crypto and DeFi solutions. Colin Butler, global head of institutional capital at Ethereum’s Layer 2 network Polygon, told Cointelegraph that while the pilot trade conducted by JPMorgan and the Monetary Authority of Singapore is a milestone towards the adoption of decentralized solutions, it also shows that these entities run tests to see if DeFi frameworks are beneficial.

“If the answer is yes, then they could significantly increase the efficiency of their operations,” he said.

Butler carried this out Polygon’s Proof-of-Stake blockchain ensured the cross-border transaction between JPMorgan, the Monetary Authority of Singapore and other banking institutions was fast, secure and as cost-effective as possible. He said:

“All of these elements are extremely important when it comes to DeFi adoption. The inherent efficiency of blockchain-based solutions gives DeFi an edge over traditional financial systems built over the past few decades. While they still “work”, these frameworks are very rigid. The latest advances in DeFi can help make the entire transaction process much more efficient and convenient.”

Echoing Butler, Seamus Donoghue, chief growth officer at METACO — a provider of digital asset custody for large financial institutions — told Cointelegraph that he believes all financial assets will eventually be represented on distributed ledgers. As such, Donoghue mentioned that there is an imperative to redesign the financial market infrastructure.

“That’s why virtually all Tier 1 banks are now investing in building new infrastructure: not for the current declining crypto market, but for the much larger vision of how each asset is represented and how value is created and exchanged, globally “, he said.

Donoghue added that banks will eventually become the bridge for institutions seeking exposure to digital assets and DeFi. He explained that this is due to the fact that traditional financial institutions have consumer confidence, large balance sheets and a network of market participants that create liquidity, and a customer base with unmet needs.

However, traditional financial institutions remain concerned about regulations. Mathias Schütz, head of client and tech solutions at SEBA Bank — a Switzerland-based digital asset bank — told Cointelegraph that regulatory uncertainties have left traditional banks reluctant to delve into digital assets.

To solve this problem, Schütz found that SEBA Bank, licensed by Swiss regulators, acts as a trusted counterparty for institutions dealing with digital assets.

“As a result, SEBA Bank has been able to partner with a number of big banks in 2022, including LGT Bank, the world’s largest family-owned private bank,” he said. This is also important from a consumer perspective, as BNY Mellon’s survey results indicate that investors are primarily concerned with the legal and regulatory framework for digital custodians.

Source: BNY Mellon 2022 Survey of Global Institutional Clients

Will Market Chaos Affect Interest in Digital Assets and DeFi?

regulations aside, those recent turn of events with FTX US and Binance may impact how traditional financial institutions view digital assets. While it is still too early to understand the fallout from this debacle, Donoghue mentioned that the restructuring of FTX US and Binance could have short-term implications. “It could change banks’ strategies to skip cryptocurrency services and focus exclusively on digital securities, at least temporarily,” he said.

Eric Berman, a regulatory expert at Thomson Reuters, told Cointelegraph that he doesn’t think this event will accelerate banks’ involvement in digital assets. “Banking institutions have been slow to take crypto as it is. The situation between FTX US and Binance probably underscores the banking sector that they did the right thing with a pragmatic approach.”

In any case, both Donoghue and Berman are aware that this event demonstrates the need for further regulatory clarity before traditional financial institutions can innovate with digital assets.

“Recent adverse industry events have underscored the critical need for secure and compliant infrastructure, business practices and regulatory oversight. If anything, the demand for wealth management from trusted institutions like regulated global banks has only increased,” Donoghue said.

It’s also interesting to note that the BNY Mellon survey examined how the Collapse of the Terra ecosystem has impacted institutional investors. According to the report, 9% of institutional asset managers said Terra’s collapse had no impact on their digital asset plans, while 50% said they took a short-term pause to reassess, noting they are likely to resume soon .

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Regarding whether the bear market will affect banks’ interest in digital assets, Butler explained that the crypto market is not a big factor affecting banks, especially when it comes to DeFi. For example, he pointed out that JPMorgan used Polygon to conduct a live cross-currency transaction that included tokenized deposits in Singapore dollars and Japanese yen, and a simulation of tokenized government bonds. According to Butler, these assets have no correlation with crypto prices. He added:

“Essentially, financial institutions are looking at ways to tokenize traditional assets — and this could be anything from bonds and fiat currencies to real estate deeds — and settle them digitally. As such, these tokens retain the value of their “original” assets, so it’s more about the technology itself than crypto prices and bear/bull markets.”