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Financial institutions cautiously make room for cryptocurrency

Blockchain sector’s growth is encouraging fintechs and services companies to adopt

PayPal’s recently announced support for cryptocurrency may seem out of left field, but the gambit underscores the pressure financial institutions are under to plan for wider adoption of digital assets.

It also is evidence of the financial sector’s growing acceptance of bitcoin, which has seen its price double in 2020 and soaring by over 30% in the last three weeks.

PayPal is following in the footsteps of its rival Square and the trading app Robinhood, which both introduced cryptocurrency buying and selling in 2018. In recent years, traditional financial firms like J.P. Morgan and Fidelity Investments have also launched crypto initiatives in the form of JPM Coin (a blockchain payments platform) and Fidelity Digital Assets (a custody business). 

Considering that large fintechs and banks have ample resources to dabble in cryptocurrency ventures, a more telling assessment of crypto’s mainstream growth is whether smaller fintechs and medium-sized financial institutions are rolling out their own crypto projects.

Based on conversations FinLedger has had with industry executives, it appears those efforts are gaining steam as more small- and medium-sized fintechs and financial firms begin discussing whether, how and when to get in on the crypto act.

“The interest in crypto has returned with direct interest in full support or as an outsourced option,” said Bryce VanDiver, a partner at financial services consultancy Capco, which works with a range of fintechs and financial services clients. “Strategy design around customer segment, value prop and differentiation, as well as the digital integration, from UI/UX to production release, is underway at many institutions.”

VanDiver said that a number of Capco’s clients are considering building infrastructure to support bitcoin and other blockchain-based tokens as a mechanism of exchange.

“This is an area where a potential consortium or utility-based services play with a number of FIs may lead to innovation and adoption,” he added. 

Payveris, a Connecticut-based payments platform with about 50 employees, is an example of a fintech that hasn’t made any crypto moves yet, but is eyeing the space closely.

“As the industry continues to navigate what cryptocurrency means and where it will ultimately best fit, we see several key use cases where our platform can help financial institutions leverage it to empower their customers and members,” said Nate Dudek, chief technology officer at Payveris.

Dudek noted that there have been internal discussions at Payveris about crypto ventures, but cautioned that demand from financial institutions remains “relatively low,” and that no such initiatives are immediately forthcoming. 

Other fintechs were early entrants into crypto, but have since changed course. 

Bottomline Technologies, a New Hampshire-based business payments platform that trades on Nasdaq, piloted a program with the blockchain payments firm Ripple, but that effort fizzled out. A representative for Bottomline says the company does not have “any [crypto] tests or initiatives underway at present,” but continues “to assess the emerging cryptoasset market opportunity.”

Financial firms working directly with crypto clients face more pressure to adopt, particularly with regard to invoicing. Take Wipfli LLP, an accounting and tax advisory firm headquartered in Milwaukee that employs 2,000 people and services a range of financial and crypto clients. That work has spurred Wipfli to work towards accepting cryptocurrencies as a form of client payment. 

“We’ve done our research and identified various ways to accept crypto, each having varying degrees of exposure to price volatility and risk, so now we’re in the process of determining the mechanics and which of those ways we’re most comfortable pursuing,” said Andrew Belz, a manager at Wipfli

Belz adeed that PayPal’s crypto play is a harbinger of what’s to come for the financial sector. 

“These crypto deposits that PayPal will eventually have is just the start of banking services and who knows what’s next – loans and LOC collateralized by crypto, interest bearing crypto accounts, crypto debit cards, etc.,” he said. “These are all services that banks can offer and there are fintech companies out there to help them.”

Regulatory encouragement is clearing the path

Legal uncertainty has long dissuaded companies from dabbling in crypto, but recent developments suggest that U.S. regulators are growing more comfortable with digital assets, giving some financial firms a green light. 

At the national level, the Office of the Comptroller of the Currency recently authorized federally chartered banks to hold crypto for clients. The directive appears to have already encouraged JP Morgan to consider expanding beyond JPM Coin and towards the launch of cryptocurrency custody services–The Block cites sources at J.P. Morgan who said the OCC guidance “makes custody a more viable business than it has been historically” for the bank. 

Meanwhile, the Federal Reserve’s research on launching a tokenized dollar has taken on new urgency in response to China’s progress in rolling out its digital yuan. Fed Chair Jerome Powell said earlier this month that he’s open to private sector collaboration on a digital dollar, creating a potential opportunity for fintechs and banks to offer distribution and technical expertise. Mastercard is already positioning itself for involvement, launching a “Central Bank Digital Currencies Testing Platform” last month. 

New York state’s move in June to relax standards around its coveted BitLicense may be the most consequential regulatory development in the near term. Under the revised guidance, companies can now partner with BitLicense holders to launch their cryptocurrency services, rather than going through the lengthy and costly application process for their own charter. PayPal was the first company to take this path, partnering with BitLicense holder Paxos to launch its recent product. 

“The most common use of the conditional license is likely to be the PayPal model, with the applicant taking responsibility for customer-facing requirements and the existing Bitlicensee taking responsibility for more technical back-end functionality such as crypto custody and trading,” said Adam Shapiro, a former U.K. regulator and partner at Klaros Group, a regulatory and business consultancy. 

“This has the potential to allow non-crypto financial services firms to enter the crypto market for NY customers faster.”

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