To date, the narrative around digital assets has largely been shaped by cryptocurrencies. Since the inception of Bitcoin, much attention has been paid to the idea of decentralization and transactions without intermediaries.
The Bitcoin white paper highlights the shortcomings of TradFi institutions. Referencing the 2008 financial crisis, he talks about the need for a trustless system, where users can exchange funds without having to store them with a bank.
More than a decade after its inception, Bitcoin has become the most widely used cryptocurrency, but perhaps not for its purpose.
“Most of the money used in Web3 today is for speculative investments,” said Umar Farooq, CEO of Onyx by JP Morgan, at the Green Shoots digital asset development panel held. Monday August 29.
Moderated by Sopnendu Mohanty, Chief FinTech Officer of the Monetary Authority of Singapore (MAS), the panel also includes the CEOs of Nansen, Contour and Paxos.
“Banks learned their lesson in 2008,” Farooq continues. “If you go down this road, it will probably end badly.”
Cryptocurrencies and digital assets
Although they have become one boy poster somehow, cryptocurrencies represent only a small subset of the digital asset ecosystem. Farooq emphasizes the potential of Web3 and digital asset technology, however, he argues that current use cases for cryptocurrency are few and far between.
We remain very attached to [digital asset technology] and invest heavily in it. When you look at Web3 and what it may one day be, it would be pretty myopic for financial institutions not to be very involved in this technology.
– Umar Farooq, CEO, Onyx by JP Morgan
As such, JP Morgan is looking at ways to enhance the existing infrastructure – for trading assets such as stocks and bonds – with blockchain technology.
Carl Wegner, CEO of trade finance firm Contour, echoes a similar sentiment. “We are looking at letters of credit – which have been around for 400 years – and digitizing the process to put it on a blockchain or distributed ledger. We are not creating a new product.
Contour is backed by some of the biggest banks in the world, such as HSBC and Standard Chartered, in this endeavor.
We are not the FinTechs stealing their lunch. We are the FinTech helping them on this digital journey.
– Carl Wegner, CEO of Contour
These comments show that blockchain technology can serve different purposes. In the case of Bitcoin, it was meant to facilitate an alternative to the traditional banking system.
On the other hand, companies such as JP Morgan and Contour use it to make their existing operations more efficient.
Banks vs Crypto Companies
While it is certain that the financial industry is being disrupted by digital asset technology, it remains unclear who is leading the charge.
Currently, crypto exchanges facilitate cross-border transfers, often at far lower costs than banks can offer.
If I want to send US dollars from my bank to any other country, it can cost me quite a lot. It’s also slow, and there’s about a 30% chance that the receiving bank won’t recognize it while charging a fee. If I send a stablecoin, it will cost me a dollar or less.
– Alex Svanevik, CEO of Nansen
Farooq argues that this is a benefit that will cease to exist over time. “[Bank transfers] are expensive, but this is due to reasons such as AML, KYC and last mile portability. Once the regulatory arbitrage between the crypto industry and TradFi becomes smaller, the delta will not be as important.
In Singapore, crypto exchanges are already underway to comply with AML and CFT regulations. Farooq believes this could lead to higher transaction fees in the future. He also takes issue with Svanevik’s claim that wire transfers have a 30% rejection rate.
Beyond transaction fees, existing regulations also put TradFi companies at a disadvantage compared to other crypto players.
“You have a whole section of the industry that is frankly not regulated at all and can do whatever they want,” says Farooq. This contrasts sharply with the requirements that banks must meet.
As a result, crypto companies are often able to innovate faster, although their products may not be as safe for consumers to use.
The issue of trust
In the long term, Farooq suggests that banks will come out on top despite their slow start.
“When we do something, we know we are ticking all the AML/KYC boxes to sanction screening and fraud checks,” he explains. “It makes it much safer for our customers, whether they are wholesalers or retailers. I think customers will probably come to us because one of the institutions they trust the most, for better or for worse, is their bank.
This theory could be put to the test once banks start implementing tokenized deposits. These would serve a similar purpose to stablecoins, in which a customer’s currency deposits would be represented as on-chain tokens.
However, unlike stablecoins which can have unstable pegs – Terra USD, for example – tokenized deposits would be regulated the same as traditional bank deposits.
When asked if these repositories can compete with stablecoins, Farooq said, “I don’t think it will be competitive, I think [tokenised deposits] will be a winner. »
“When you think about moving big money. JP moves 10 trillion US dollars every 24 hours. While we do this, we follow all the rules. All our regulators are satisfied with the approach.
Farooq argues that stablecoins would still exist, comparing them to existing payment systems such as PayPal and Venmo.
Private options will always exist, but when it comes to serious transactions – hundreds of millions of dollars – you will always turn to a regulated financial institution. Government, regulators and financial infrastructure support them.
– Umar Farooq, CEO, Onyx by JP Morgan
That being said, tokenized repositories are unlikely to become a reality until the digital asset ecosystem matures. Financial institutions need regulatory clarity before they can jump into the space. This will only happen when there are more use cases surrounding cryptocurrencies and stablecoins.
“Most cryptos are still garbage. With the exception of a few dozen tokens, everything is still noise. Use cases haven’t increased and regulations haven’t caught up, which is why the financial industry is a bit slow to catch up. When they catch up, the big institutions will absolutely win,” he adds.
Featured image credit: Financial News London / Green Shoots
Also Read: MAS Plans to Regulate Retail Access to Cryptocurrencies, Restricting Leveraged Trading
