Adoption of cryptoassets will transform banking
As the regulation of cryptoassets in the U.S. starts to become clear, financial institutions and nationally chartered banks are breaking into the crypto space by launching new products, services and operations designed to engage customers, says a new report from KPMG: Banking blueprint for the crypto world.
“The institutionalization of cryptoassets has continued to accelerate, even in today’s turbulent economic environment,” says Arun Ghosh, One Americas Blockchain & Cryptoassets leader at KPMG LLP.
“Adoption is moving from the fringes of finance to the largest and most venerable global institutions in the world.”
The report says along with increasing regulatory clarity, adoption is being driven by the rising interest among investors and increased acceptance of stablecoins and growing acknowledgement of the role of central bank digital currencies (CBDCs).
To meet the needs of cryptoasset owners, especially at the institutional level, the report says a bank’s operations need to evolve.
“We believe that evolving capabilities and business models in the key areas where crypto activities touch current operations will help banks seize the most promising opportunities in the expanding crypto market,” said Ghosh.
“Interest and adoption of crypto products and services continues to rise among both retail and institutional investors,” said Sam Wyner, OneAmericas Blockchain and Cryptoassets Director at KPMG LLP.
“As crypto goes mainstream, it is accelerating the path for massive innovation in the banking sector, including fundamentally new products and services, such as custody, payments and risk management with significant future growth potential,” he added.
The report identified seven key elements that are essential to a bank’s operational infrastructure to deliver innovative and competitive crypto-based services.
Seamless customer experience
Banks that are investing early and embracing this new wave of ‘digital gold’ will feature retail and commercial interfaces that allow for seamless engagement between crypto products and services and traditional assets. The environment is likely to be similar to web and mobile apps that banking customers use today. In an all-in-one digital setting, crypto customers will be able to access assets easily and quickly perform transfers for paying bills and purchasing goods and utilize assets for lending and borrowing activities.
Modernized custody models
The custody and control of cryptoassets is significantly different from traditional financial assets. Given this unique control model, traditional bank custody frameworks, processes and technologies must evolve for the crypto ecosystem. Back-office systems for storing, safeguarding, and accounting for digital assets are built on a new kind of technical foundation, specifically designed for cryptoassets native to public blockchains.
Reporting and auditing capabilities
Trust is essential to attracting and retaining crypto-based banking customers, especially institutional ones. To compete in this growing market, banks will need to show that their cryptoasset services are transparent, have integrity and are aligned with best practices.
Integrating public blockchain data with internal data
Public blockchains house a detailed history of every single transaction that has ever been confirmed on the network. This data is encrypted and compressed as the blockchain extends, creating challenges when it comes to normalizing and using blockchain transaction data. Organizations must overcome the challenge of building unified views of their customers and clients’ on-chain and off-chain transactions in order to achieve business, compliance and risk-management objectives.
Next-level cyber security
Cyber security stakes are higher in the crypto arena primarily because of the finality of transactions on public blockchains. Cryptoassets that erroneously change hands on public blockchains cannot be recovered by the original asset owner since there are no central authorities responsible for confirming, clearing, settling and accounting for the transaction. Next-generation security is required to monitor and defend against the cyber and information-security risks of cryptoasset businesses.
Industry-standard risk management and controls
Cryptoassets present fundamentally new risks that must be analyzed, understood and managed. While there are unique risks, blockchain infrastructure also presents new opportunities to deploy automation across risk management and controls that were not previously possible with traditional technology infrastructures.
Robust regulatory compliance
Banks launching crypto products and services must comply with specific regulatory requirements, which will help them develop robust risk-based compliance programs that go beyond compliance for traditional assets. Significant crypto-relevant regulations are carryovers from the traditional financial industry, including Anti-Money Laundering (AML), Know Your Customer (KYC), Bank Secrecy Act (BSA) and the FATF Travel Rule, which requires firms to share customer information when they transfer funds between firms.
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