How cryptocurrency may be going mainstream

Once a fringe payments solution, cryptocurrency is finding its way inside traditional financial services.

A series of announcements demonstrate how industry veterans have jumped on the cryptocurrency bandwagon. In late 2020, JPMorgan launched its Onyx blockchain business division and promoted its first live commercial transactions of its cryptocurrency, JPM Coin. Then, in the first quarter of this year, Visa announced that it had enabled cryptocurrency in 70 million stores and made a prediction that cryptocurrency will be “extremely mainstream” within five years. Even the Office of the Comptroller of the Currency (OCC) has signaled a more progressive stance on the technology, naming Anchorage Digital Bank the country’s first federally chartered digital asset bank.

Beyond this headline hype, studies show that demand for the technology extends into the marketplace, with consumers indicating a growing preference for cryptocurrency solutions. Surveys estimating the number of Americans who own cryptocurrency vary greatly, but it’s clear that tens of millions of Americans have entered the crypto market. Worldwide, more than 100 million people own some form of cryptocurrency, according to a recent survey from Crypto.com. 

Quontic Bank’s crypto product

Yet, cryptocurrency has been around for more than a decade with limited traction, leaving community banks wondering exactly what is driving this recent swarm of activity.

“There are a lot of factors at play [such as] the greater interest and drive toward digital solutions in the wake of the pandemic,” says Brian Laverdure, ICBA’s vice president of payments and technology policy. “Actors from all different sides are taking a look, with central banks researching the technology and possibilities of issuing central bank digital currencies, and private sector innovation [continuing]. It’s a confluence of different factors.”

This perfect storm of interest has led to new solutions that enable community banks to dive into the cryptocurrency pool. For example, solution provider NYDIG, the bitcoin subsidiary of Stone Ridge, a $10 billion-asset alternative asset manager, provides three main bitcoin services for financial institutions: a trading platform, a rewards platform for debit and credit cards, and an interest platform where consumers earn interest in bitcoin instead of dollars.

“We’re trying to empower the incumbents—whether that’s existing banks or existing service providers—to be able to offer these types of products and services,” says Patrick Sells, head of banks solutions at NYDIG.

Quontic Bank, where Sells was formerly chief innovation officer, stepped up as an early adopter of cryptocurrency offerings, launching a bitcoin rewards checking account in late 2020. The $1.4 billion-asset digital bank in New York City now has undergone a soft launch of the program, having signed several hundred customers to the program, with plans for a full rollout later this year.

“It was important just to be first to market with this product,” says president, CEO and chairman Steve Schnall.

While Schnall shared that Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements were an early compliance hurdle, Quontic Bank quickly recognized that the provider it chose would make a difference. In this case, NYDIG offered built-in safeguards, serving as both the contractual service provider and the contractual custodian, limiting the direct risk to the bank.

“The main idea here is that the bank never actually takes ownership of the bitcoin,” Schnall says. “We simply don’t take custody. Instead, when our customers use their debit cards, they earn a 1.5% reward. We then take that cash and we fund NYDIG. NYDIG purchases the bitcoin and then distributes it to our customers’ subledgered wallet, which [they are] the custodian of.”

“Customers actually want banks to play the leading role [with cryptocurrency]. They don’t want a tech company; they want a bank, because banks are trusted.”

—Patrick Sells, NYDIG

Banks remain skeptical

Despite these advancements, many banks may be reluctant to dive into cryptocurrency due to the risks, lack of regulations or turbulence. Data released in January 2021 found that 79% of financial institutions had no interest in offering cryptocurrency investment services, and a survey of fund managers revealed that 74% see bitcoin as a “bubble.”

But the time may be coming when community banks begin taking up cryptocurrencies in a more aggressive manner because consumers are asking for these solutions. In fact, a Cornerstone Advisors survey showed that 60% of cryptocurrency owners would use their bank to invest in cryptocurrencies if they could. And NYDIG reports that 80% of current bitcoin holders want to move it to their bank.

“Nine months from today, banks will be leading the charge with bitcoin,” Sells says. “Customers actually want banks to play the leading role. They don’t want a tech company; they want a bank, because banks are trusted.”

But even with the opportunity that lies ahead, experts encourage community banks to consider cryptocurrency in terms of their bigger payments strategies.

“Learn about what’s happening [with cryptocurrency], but recognize, too, all the innovation and all the really positive impacts of those traditional systems and the new ones coming from the traditional players, like FedNow,” Laverdure says. “Those are solving today’s problems.”