Cryptocurrencies: Are they the future of digital banking?

Cryptocurrencies may have once been the preserve of early-adopters and currency speculators, but now virtual currencies have matured, they are increasingly being embraced by the banking industry as a way of expanding the financial channels offered to customers.

While one of the perceived advantages of cryptocurrencies like Bitcoin is the absence of central control, the lack of agreed regulation may have traditionally put off businesses and banks from using crypto. However, the situation is beginning to change.

Thanks to a new raft of regulatory changes in various jurisdictions across the world, cryptocurrencies are increasingly being addressed by existing financial governance structures. Now, crypto firms are adapting so they can operate under current financial regulations, or alternatively regulations are being altered to embrace such virtual currencies – for example, the New York Department of Financial Services has issued trust licences to a number of crypto companies.

Moves by companies outside the financial world to adopt cryptocurrencies, such as Facebook's decision to launch its own cryptocurrency known as Libra, are also inspiring banks and their customers to start investigating the potential of virtual currencies.

In turn, companies that make their living from providing market intelligence to the financial services industry are launching cryptocurrency-related products, both reflecting interest from the financial sector in cryptocurrencies and offering insight to those looking to adopt them. Nasdaq, for example, recently added cryptocurrencies to its datasets, while market data companies such as Bloomberg and Thomson Reuters have already started sharing cryptocurrency market information with their customers.

The big banks are now taking one of two approaches to cryptocurrencies. Some are hoping to wrap cryptocurrencies into their existing business models, while others are looking to launch their own cryptocurrencies. JP Morgan, for example, was the first US bank to launch its own cryptocurrency, known as JPM Coin, which will be used to settle transactions between its wholesale payments clients and has already been tested with customers. Goldman Sachs, meanwhile, has taken the alternative stance, suspending plans for its own cryptocurrency in favour of dealing with Bitcoin for clients and potentially even opening a cryptocurrency trading desk.

Central banks are also embracing cryptocurrencies, with countries looking to build digital currencies that could be exchanged for their own local fiat currency.

The Bank for International Settlements published a report earlier this year that found the substantial majority of central banks are conducting research into their own digital currencies. "Many are progressing from conceptual work into experimentation and proofs-of-concept, including in cooperation with other central banks," the report said. Sweden's e-Krona and Uruguay's e-Peso are among the most advanced in the field, with the countries making significant progress on digital versions of their national fiat currencies.

As financial services companies begin exploring the possibilities of their own cryptocurrencies, as well as making existing ones more accessible to their customers, businesses are more and more likely to encounter customers and suppliers wanting to pay, or be paid, with cryptocurrencies.

While big banks may have been slower to adopt cryptocurrencies, virtual banks have not been so reticent. ePayments is among the virtual banks offering cryptocurrency services, giving customers the ability make and receive payments in virtual currencies, using their ePayments account rather than going through a third party.

Banks, virtual and otherwise, are not the only ones bringing traditional financial infrastructure to cryptocurrencies: fintech start-ups have started to recast some physical-world banking trappings to cryptocurrencies: cryptocurrency ATMs can be found in several major cities. While they may be a relatively niche proposition now, their number is still on the up, and there are thought to now number over 5,000 globally.

Perhaps the biggest change that cryptocurrencies have brought to the financial services industry, and its enterprise customers, is the surge in interest around blockchain. For both big banks and start-ups, blockchain – the 'decentralised ledger' system that underpins cryptocurrencies like Bitcoin – offers a whole new approach to security, making the jobs of would-be counterfeiters and hackers far harder.

Regardless of the industry they operate in, companies are likely to find themselves using greater numbers of blockchain-based products in future. Even those organisations not quite ready to start accepting virtual currency payments can still strengthen their business with the same technology that powers the cryptocurrency economy.

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Cryptocurrencies: Are they the future of digital banking?
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