Institutions are coming, but is crypto still waiting?

Traditional financial institutions finally beginning to embrace bank-grade digital assets

The future of finance is here. Financial institutions have been slow to adopt crypto, but digital assets are already transforming the global landscape with neobanks and non-banks leading the charge. While the PayPal stablecoin, central bank digital currency projects and other recent developments may finally awaken the incumbents, the doors to finance have already been blown wide open. The rise of embedded finance through fintechs, telecoms, ecommerce and superapps is building out new systems through embedded crypto.

Digital assets firms have been preparing for institutional adoption for years. It makes sense for traditional businesses to partner with crypto industry expertise to expedite market entry while minimising upfront costs.

Some banks are piloting ring-fenced projects, including closed-loop retail trading, wealth management products and separate digital banking subsidiaries. But integrating emerging technology into well-established regulated frameworks can be complex.

For the most part, large financial institutions have taken a cautious ‘wait and see’ approach to adopting crypto, waiting for regulatory clarity and weighing uncertain market opportunities against risks and resources.

While waiting for the institutions to come, digital assets infrastructure providers have been building their technologies and policies to ‘bank-grade’ standards. Security, compliance and scalability are just some of the non-negotiable requirements of regulated institutions for integrating blockchain technology onto their platforms.

For security, service providers must pass rigorous tests on cyber threats and control vulnerabilities. For compliance, trading and fund flows must navigate a complex web of regulatory frameworks, across securities regulation, money transmission rules and know your customer/anti-money laundering policies. For scalability, implementations must be robust in the face of significant transaction volumes and resilient against downtime.

Leading digital assets infrastructure providers have been operating at these bankgrade standards for years, but because of the non-bank clients who have led adoption. This accumulated experience means that digital assets infrastructure providers can now provide the more conservative institutions with the comfort of being tested partners.

Despite the vision for worldwide transformation of finance, the global crypto industry is still subject to local requirements. First-hand experience across different parts of the world proves that blockchain infrastructure works at scale, but the technologies and best practices still require significant adaptation in each specific country. To succeed, crypto firms will need to demonstrate flexibility in building solutions with their local partners.

While disruptive fintech and embedded finance challengers have been actively pursuing crypto use cases for digital money, banks have been slow adopters. However, incumbent banks still have many advantages when they choose to get involved due to their long-standing businesses being shaped by the regulatory and localisation requirements in their markets.

Whether bank or non-bank, all players in the crypto financial services race must ultimately find a suitable infrastructure partner. To accomplish the mission of mass adoption, crypto firms must provide the embedded crypto solutions that make technology integration and regulatory compliance easy for their clients to jump in.

Mike Leung is head of corporate strategy at Aquanow.

This article was originally published in ‘Digital assets: building the markets of the future’. Download the report below.

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