Banks and cryptocurrency: How digital currencies are transforming banking
How cryptocurrency affects banks
Cryptocurrency and crypto assets are changing how we think about the financial industry and challenging traditional banking paradigms. Fundamentally, this is because blockchain technology allows for peer-to-peer transactions without the need for trusted intermediaries.
For example, Bitcoin’s layer 2 solution, the Lightning Network, enables instant, low-cost payments without the need for traditional banking infrastructure (assuming you’re happy with liquidity remaining in Bitcoin, of course).
Blockchain’s innovation exemplifies how cryptocurrency has the potential to reshape core banking services, particularly in two key areas.
- Cross-border payments: While traditional SWIFT transfers can take 1-5 business days and incur multiple intermediary fees, stablecoins like USDC or USDT enable near-instant international settlements 24/7, typically costing a few dollars in network fees. These dollar-pegged cryptocurrencies eliminate the need for complex correspondent banking relationships and currency conversions that make SWIFT expensive and slow. The key advantage of stablecoins is combining the price stability of fiat currency with the speed of blockchain technology, though they do introduce other risks like reliance on the stablecoin issuer’s reserves.
- DeFI has the potential to automate lending and credit services, reducing overhead costs. Current DeFi platforms are over-collateralized, as they don’t conduct traditional credit checks and thus also carry higher interest rates. As on-chain data matures, DeFi protocols could even implement more complex credit assessment models based on verifiable transaction history, digital identity, and cross-platform reputation systems. This could help lenders make smarter, data-driven lending decisions and reduce the administrative costs commonly wrapped into traditional loan interest rates. The combination of automated loan servicing and rich on-chain data could ultimately lower barriers to access while maintaining responsible lending practices.
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What do banks think about cryptocurrency?
The banking sector’s stance on cryptocurrency has evolved dramatically over the years. It ranges from outright opposition to enthusiastic adoption, with many former critics either reversing their positions or significantly softening their stance. Digital asset firms have played a crucial role in this evolution, especially during periods of market volatility and regulatory changes.
A prime example is JPMorgan Chase. In 2017, CEO Jamie Dimon famously called Bitcoin a “fraud.” Today, the bank holds Bitcoin and Ethereum ETFs and a large holding of MicroStrategy. How things can change!
Several factors influence banks’ current views on cryptocurrency:
- Regulatory environment: introducing comprehensive frameworks like the EU’s MiCA regulations has provided greater clarity, encouraging traditional banks to enter the crypto space. The SEC’s approval of Bitcoin and Ethereum ETFs in the US has signaled growing institutional acceptance.
- Market demand: customer interest in cryptocurrency services continues to grow, forcing banks to reconsider their positions. Many clients now expect their financial institutions to provide crypto-related services, and at the bare minimum, facilitate transactions to crypto exchanges.
Why are banks blocking cryptocurrency?
- Risk and volatility: Even mainstream cryptocurrencies like Bitcoin still carry significant risk and volatility. While ETFs provide easier access to retail and institutional investors, including through custody solutions, cryptocurrencies still have a long way to go in terms of risk and volatility.
- Reputational concerns: Banks are wary of association with potential scams, market manipulation, or criminal activities. Since cryptocurrencies and crypto exchanges vary widely in compliance with banking standards, many institutions take a blanket approach to avoid risk.
- Compliance challenges: Cryptocurrency transaction flows can often be opaque or too complex to satisfy banks that are getting involved with crypto exchanges.
Do banks work with cryptocurrency?
The landscape has evolved, with more banks moving from opposition to exploring cryptocurrency services, including the rise of the crypto-friendly bank. This includes:
• More and more banks are providing their services to crypto platforms to assist FX conversion as well as fiat to crypto exchange
• Neobanks such as Revolut integrating crypto trading
• Payment providers such as PayPal support cryptocurrency transactions and provide their own stablecoins
Some notable examples include:
• JPMorgans use of JPM coin for internal transfers
• Fidelity comprehensive digital asset custody services
• Goldman Sachs’ entry into Bitcoin derivatives trading
How are banks responding to cryptocurrency
Bank’s responses to cryptocurrency have evolved into three distinct strategic approaches:
• Strategic initiatives: The most proactive banks are launching comprehensive digital transformation programs. Although these are long-term and often only conducted for research purposes, they have the potential to fundamentally reimagine banking for the blockchain era. This includes developing new blockchain platforms, modernizing payment systems, and creating innovative digital services.
• Fintech collaboration: recognizing the complexity of crypto integration, many banks are pursuing strategic partnerships with fintech companies. These collaborations take various forms:
• Technology sharing agreements
• Direct investments in crypto startups
• Joint venture projects
• Service integration partnerships
•Digital currency development: banks are becoming increasingly involved in digital currency projects, particularly in two areas
– Central bank digital currencies (CBDCs): working with central banks to develop national digital currencies
– Stablecoins: creating or supporting price-stable cryptocurrencies backed by traditional assets
Banks that allow cryptocurrency transactions
Several forward-thinking banks are fast becoming leaders in assisting cryptocurrency adoption. Some include:
• Goldman Sachs: Offering comprehensive crypto trading and investment services
• Custodia Bank: explicitly built for the crypto era
• Customers Bank: Providing crypto-friendly business banking
• Mercury: Catering to crypto startups and business
• Fiat Republic: While Fiat Republic is an EMI, not a bank, we give customers the edge by aggregating banking connections, minimizing the risk of debanking
Future of banks with cryptocurrency
The future relationship between banks and cryptocurrency is still up in the air. Rather than an either/or scenario, we’re currently seeing the emergence of hybrid institutions that combine the stability and trust of traditional banking with the innovation of cryptocurrency technology.
Here is an overview of some of the things we might see bridging traditional and crypto finance
Retail banking services
• Integrated crypto and fiat accounts
• Instant conversion between currencies
• Crypto-backed credit cards and loans
• Yield-generating crypto savings accounts
Institutional services
• Prime brokerage for digital assets
• Custody solutions for large crypto holdings
• Trading desk integration for crypto markets
• Settlement services using stablecoins
Investment products
• Crypto ETFs and mutual funds
• Tokenzied traditional assets
• Yield farming through regulated DeFi platforms
• Crypto-based retirement accounts
The future isn’t just theoretical – we’re already seeing early versions through innovations like:
• JPMorgan’s Onyx platform for wholesale banking
• Fidelity’s institutional Digital Assets service
• Goldman Sach’s digital asset trading desk
• DBS Bank’s digital exchange in Singapore
The key difference from today’s landscape will be the seamless integration of these services, making the underlying technology invisible to end users and delivering the benefits of both traditional banking and cryptocurrency innovation.
What crypto will banks use?
It’s important to note that this is highly theoretical and subject to change. However, it is undoubtedly the case that many banks are at least researching some version of crypto integration or offering. In these instances, here is what they would consider:
Selection criteria:
• Security features and track record
• Scalability potential
• Regulatory compliance status
• Market adoption and liquidity
Primary options under consideration
CBDCs
• Government-backed
• Regulated environment
• Traditional banking integration
Stablecoins
• Price stability
• Easy integration
• Existing market acceptance
Major cryptocurrencies
• Bitcoin: Store of value and settlement
• Ethereum: Smart contract functionality
• Ripple: Cross-border payments
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Could central bank digital currency put banks out of business?
While digital currencies have the potential to present significant challenges to traditional banking, they’re more likely to transform banks than eliminate them. The key threats are real: crypto enables direct peer-to-peer transfers, which could reduce payment fees and payment times in certain cases, while DeFi platforms offer lending without traditional intermediaries. Crypto-native firms are also attracting younger customers with higher yields and innovative services.
Central Bank Digital Currencies (CBDCs) represent a different kind of transformation. Rather than replacing traditional banking, CBDCs, if adopted, are more likely to operate behind the scenes, modernizing payment infrastructure. This CBDC model would enhance interbank efficiency without disrupting the fundamental bank-customer relationship or requiring a complete overhaul of the fractional reserve banking model. Banks could continue their core functions of taking deposits, making loans, and managing customer relationships but with enhanced backend capabilities for instant settlement, reduced reconciliation needs, and improved liquidity management through programmable money. The key is that customers might never directly interact with CBDCs, even while benefitting from their improved efficiency.
However, banks have significant advantages that will help them adapt rather than disappear. Their regulatory compliance frameworks, government backing, and deposit insurance provide trust that pure crypto solutions struggle to match. Banks also offer essential services beyond what cryptocurrency can currently provide, such as mortgages, business credit lines, and comprehensive wealth management. We will most likely obtain hybrid institutions that will combine traditional banking with the ability to operate in the cryptocurrency world. While they keep their core services, forward-thinking banks are already developing crypto custody services, trading platforms, and blockchain-based settlement systems. Banks that can adapt their business models to include digital assets while keeping their customer’s trust safe and secure and in regulatory compliance will be the winners in this transformation.
Conclusion
While many banks were initially skeptical, some have started adopting cryptocurrency strategically. The question is now whether traditional banks should engage with digital assets and how best to do so. The signs are clear, as major entities such as JPMorgan and Goldman Sachs are developing their own crypto products. Neobanks and payment providers are increasingly providing rudimentary crypto services in response to customer push.
On the other hand, the future financial industry will likely live on as a hybrid ecosystem comprising traditional banking services and cryptocurrency features that work together and balance one another. Success for banks going forward will come from tapping into blockchain technology’s innovation and efficiency while maintaining the trust, security, and regulatory compliance of traditional banking. Nonetheless, critical challenges remain, such as regulatory uncertainty, technical integration hurdles, and new forms of risk to manage. However, these challenges are seen increasingly as opportunities for innovation rather than obstacles to adoption.
FAQ
Do banks work with cryptocurrency?
Yes, to varying degrees. Today, many banks, for example, offer crypto services ranging from crypto exposure to crypto payment support to full-fledged crypto trading. For example, JPMorgan, Fidelity, and Goldman Sachs provide crypto custody and investment services. Revolut, other neobanks, and PayPal offer various retail crypto trading and payment services.
Why are banks blocking cryptocurrency?
Banks block crypto transactions due to several key concerns: the volatile price fluctuations contribute to a high-risk profile, the reputational risks of being associated with scams or criminal activity, compliance risks with AML and KYC requirements, and limitations in the ability of their legacy systems to handle certain functions. Until clearer regulations emerge, many banks take a cautious or avoidant approach.
How is cryptocurrency affecting banks?
By allowing 24/7 peer-to-peer transactions, cryptocurrency has the potential to challenge traditional banking models and the need for intermediaries. Its core services include cross-border payments, lending services, and investment products. However, it also allows banks to innovate through blockchain adoption, cryptocurrency custody services, and more advanced digital payment solutions.
What crypto will the banks use?
While it is hypothetical, banks will likely focus on three main categories: CBDCs, regulated stablecoins, and potentially significant cryptocurrencies such as Bitcoin and Ethereum. Security features, opportunity for scalability, regulatory compliance, and the level of market adoption will be the primary selection criteria.
What banks are switching to digital currency?
No bank is currently switching wholeheartedly to digital currency. In comparison, traditional banks are mainly investigating CBDCs and stablecoins, and crypto-native banks like Mercury and Custodia Bank offer full digital asset services. There are also providers, such as Fiat Republic, who act as the bridge between banking and crypto services. This transition is still in its early days for most banks.