Crypto Prices Slump and Hacks Are Rampant: Are Consumer Banks Still Enthusiastic about Jumping into This Business?

By Aaron Lazor, CEO of MyChargeBack

How quickly things can change in the cryptoverse.

On September 16, 2020, the Wyoming State Banking Board approved the issuance of a special purpose depository institution (SPDI) charter for Kraken Financial (also known as Kraken Bank), which was designed to provide services to customers online and via mobile devices. And then on January 13, 2021, the Office of the Comptroller of the Currency (OCC) took the first step towards the establishment of the first national crypto bank in the U.S. by granting conditional approval of a federal charter for Anchorage Digital Bank NA. Anchorage calls itself “a full-service financial platform and infrastructure provider for the digital asset space.” Suddenly, legacy banks took notice. Competition does that.

Last December a new study by Visa found that nearly 40% of crypto owners surveyed said they would likely or very likely switch their primary bank to one that offers crypto-related products during 2022. But they haven’t. So what happened?

Credit Card Networks Took the Lead

Both Visa and Mastercard have been rolling out their own crypto services, usually in cooperation with fintechs or by acquiring them outright. The end game is to enable the full integration of cryptocurrency, so that all the cardholders and merchants using their networks will be able to conduct any and all of their transactions with digital assets. 

Because legacy banks issue credit cards and debit cards, they are being drawn into the cryptoverse whether they like it or not. And it turned out they liked it a lot. Banks came to understand that blockchain technology dovetails with their own needs. It can expedite payments, provide enhanced security and transparency and reduce bookkeeping errors and confusion, if not eliminating them entirely, since the blockchain is both permanent and immutable. And it can even allow banks to lower fees, which will help them reduce customer churn.

The Coming of CBCDs

Banks also have to confront the specter of central bank digital currencies (CBDCs). Nigeria, the Bahamas and the East Caribbean microstates were the first to introduce them, and now most countries are either researching the idea or actively developing their own ones. President Biden’s executive order on cryptocurrency all but commits the U.S. to launch a digital greenback. 

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Traditional brick and mortar banks are apprehensive about CBDCs, concerned that they could undermine the fiat currency that constitutes the backbone of their assets. After all, CBDCs are to be issued and backed by central banks, which would sell them directly to the public in exchange for fiat currency. Commercial banks fear that would reduce, to a degree that no one can predict at present, the amount of deposits they hold. And since those deposits are made available for loans, their profitability would decline, perhaps to unsustainable levels. 

They also point to the fact that, so far, the CBDC experiment has not met with impressive results. The East Caribbean CBDC was a dud, the Bahamas Sand Dollar is restricted to domestic transactions and the International Monetary Fund (IMF) warned that Nigeria’s eNaira, which was introduced in November 2021, could be at risk due to its presumptive use in terrorist financing and money laundering.

The Arrival of Crypto Winter

And then “crypto winter” arrived. The first shock came this past May with the collapse of TerraUSD, an algorithmic stable coin that was supposed to maintain a $1 peg but plunged to just 26 cents literally overnight. Its support coin, luna, consequently lost 99% of its value. This unexpected $40 billion crash devastated the crypto market as a whole, including crypto bellwether bitcoin, which dropped by almost 70%.

Then, in July, Celsius, a cryptocurrency lender, filed for Chapter 11 bankruptcy protection. Celsius was controversial because its interest-bearing cryptocurrency accounts were widely considered by regulators and a number of state attorneys-general to be unregulated securities. The falling price of crypto is what spelled inevitable doom for the company, since its business model was built on the supposition that crypto would only appreciate.

The bottom line is that if crypto is increasingly seen as unstable, then individual investors may have good reason to consider an old-fashioned alternative, since inflation will drive up the interest rates banks are offering on fiat currency accounts. That would hardly be good news for troubled crypto banks, and would almost certainly affect the introduction of CBDCs as well. 

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What Banks Have to Do in the Meanwhile

Until the path forward becomes clear, traditional banks have no alternative other than to exhibit maximum agility. They will have to continue with business as usual while being prepared to introduce new crypto offerings and services literally overnight. That means identifying in advance new airtight mechanisms for integrating strict, transparent anti-money laundering procedures for cryptocurrency and CBDC services.

Doing so requires sophisticated forensic tracing technology and certified investigators that they currently do not employ. Many banks may find the costs are beyond their means, in which case they would have to contract out those processes to third party service providers. That solution has its benefits, since the challenge of adopting new services for new payment mechanisms will entail unprecedented numbers of calls from customers who will need to be engaged. And bank service centers, unlike those of third-party providers, are not yet trained to handle them.

About Aaron Lazor

Aaron Lazor is CEO of MyChargeBack and an expert in the field of complex dispute resolution. Over the past two decades, Aaron has established an international reputation as one of the world’s financial services sector visionaries. With an extensive professional background on four continents, he has pioneered unique solutions for digital transactions, including cryptocurrency and credit cards, that have improved the relationship between consumers, banks and crypto exchanges. Under his leadership MyChargeBack has become an industry pacesetter, having successfully intervened on behalf of tens of thousands of clients with more than 800 banks and 450 law enforcement agencies in over 100 countries around the globe.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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