To date, the narrative around digital assets has been largely shaped by cryptocurrencies. Since the inception of Bitcoin, a lot of attention has been paid to the idea of decentralization and transactions without intermediaries.
Bitcoin whitepaper highlights shortcomings of TradFi institutions. Referring to the 2008 financial crisis, he talks about the need for a trustless system, where users can exchange funds without having to store them in a bank.
Over a decade since its inception, Bitcoin has become the most widely used cryptocurrency, however, perhaps not for its intended purpose.
“Most of the money being used in Web3 today is for speculative investment,” says Umar Farooq, CEO of Onyx by JP Morgan, at the Green Shoots Digital Asset Development Panel on Monday (Aug 29).
Moderated by Monetary Authority of Singapore (MAS) Chief Financial Technology Officer Sopnendu Mohanty, the panel also features the CEOs of Nansen, Contour and Paxos.
“The banks learned their lesson in 2008,” Farooq continues. “If you go down that path, it will probably end badly.”
Cryptocurrencies and digital assets
Although they have become a poster boy In some ways, cryptocurrencies only represent a small subset of the digital asset ecosystem. Farooq emphasizes the potential of Web3 and digital asset technology, however, he maintains that current cryptocurrency use cases are few and far between.
We remain very committed to [digital asset technology] and invest a lot in it. When you look at Web3 and what may be the clue to this one day, it would be quite short-sighted for financial institutions not to get very involved in this technology.
– Umar Farooq, CEO, JP Morgan’s Onyx
As such, JP Morgan is looking at ways to improve existing infrastructure, to trade assets like stocks and bonds, through 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 world’s largest banks, such as HSBC and Standard Chartered, in this venture.
We are not the FinTech that steals your lunch. We are the FinTech that helps you on this digital journey.
– Carl Wegner, CEO of Contour
These comments make it clear that blockchain technology can serve different purposes. In the case of Bitcoin, it was meant to provide an alternative to the traditional banking system.
On the other hand, companies like JP Morgan and Contour are using it to make their existing operations more efficient.
Banks versus cryptocurrency companies
While it is true that the financial industry is being disrupted by digital asset technology, it is unclear who is leading the charge.
Today, cryptocurrency exchanges facilitate cross-border transfers, often at much lower costs than banks can offer.
If I want to send US dollars from my bank to any other country, it can cost me a lot. It’s also slow, and there’s about a 30 percent chance the receiving bank won’t recognize it while you’re still claiming a fee. If I send a stable coin, 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] they 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 winds down, the delta won’t be as big.”
In Singapore, cryptocurrency exchanges are already taking place to comply with AML and CFT regulations. Farooq believes this could lead to increased transaction fees in the future. He also rebukes Svanevik’s claim that bank transfers have a 30 percent bounce rate.
Beyond transaction fees, existing regulations also put TradFi companies at an additional disadvantage compared to other crypto players.
“There is a whole part of the industry that is frankly not regulated at all and can do whatever they want,” says Farooq. This contrasts sharply with the requirements banks must meet.
As a result, crypto companies are often able to innovate faster, even though their products may not be as secure for consumers.
The question of trust
In the long term, Farooq implies that the banks will gain despite their slow start.
“When we do something, we know we check all the boxes, from AML/KYC to sanctions and fraud detection checks,” he explains. “This 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 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 that can have unstable parities (Terra USD, for example), tokenized deposits would be regulated in the same way as traditional bank deposits.
When asked if these deposits could compete with stablecoins, Farooq says, “I don’t think it’s competitive, I think [tokenised deposits] will be a winner.”
“When you think about moving important money. JP moves US$10 billion every 24 hours. While we do that, we are complying with all the rules. All of our regulators are satisfied with the approach.”
Farooq argues that stablecoins would still exist, comparing them to existing payment systems like PayPal and Venmo.
Private options will always exist, but when it comes to serious transactions (hundreds of millions of dollars), you will always look for a regulated financial institution. The government, regulators and the financial infrastructure support them.
– Umar Farooq, CEO, JP Morgan’s Onyx
That said, tokenized deposits are unlikely to become a reality until the digital asset ecosystem matures. Financial institutions need regulatory clarity before they can make a move in the space. This will only happen once there are more use cases related to cryptocurrencies and stablecoins.
“Most cryptocurrencies are still junk. With the exception of a few dozen chips, it’s all still noise. Use cases have not increased and regulations have not caught up, which is why it takes a while for the financial industry to catch up. When they catch up, the big institutions will absolutely be the winners,” he adds.
Featured Image Credit: Financial News London/Green Shoots
Also Read: MAS Considers Regulating Retail Access To Cryptocurrencies, Restricting Leverage Trading