Digital currency and blockchain technology have yet to deliver significant financial gains for banks, despite the hype.
The digital assets space, while challenging, presents a growing opportunity for traditional financial institutions. However, high operating costs and limited revenue potential, particularly for basic services like custody and trading, require strategic expansion.
To achieve sustainable profitability, institutions must focus on functional depth along the digital value chain. This could involve expanding offerings to include crypto payment processing, real-time payments, data authentication, stablecoin infrastructure, and decentralized finance (DeFi) protocols.
Crypto payment processing, with merchant tools, payment gateways, and integration support, allows businesses to accept digital assets as payment. Custody and liquidity solutions tailored for institutional clients support secure asset management and trading liquidity. Real-time payments improve speed and transparency of settlements across sectors. Data authentication and supply chain transparency leverage blockchain’s tamper-resistant ledger to verify provenance and validate transactions.
Decentralized Finance (DeFi) protocols such as lending, yield farming, and multi-party computation (MPC) wallets enhance key management and security in digital banks and fintechs. Cross-chain interoperability and secure data oracles enable automated and trusted delivery of financial data and tokenized asset transactions across blockchain networks and traditional systems. Stablecoin infrastructure facilitates transparent, compliant, and scalable digital currencies for global payments and settlements.
Implementing these blockchain-based value-added services comes with operational and economic challenges. Adopting scalable enterprise blockchain platforms, integrating legacy banking systems with decentralized blockchain elements, and developing specialized risk modeling and security strategies are crucial steps. Employing middleware and interoperability layers, leveraging consulting and integration services from blockchain technology firms, and addressing economic efficiencies by reducing intermediation costs and streamlining workflows are also key.
Crypto lending and collateral management offer attractive prospects for institutions, providing interest and fee-based income sources. Tokenization of real assets generates additional revenue for institutions through origination fees, listing fees, custody fees, and transaction charges.
However, these offers only have an impact within a comprehensive digital asset strategy, anchored in the overall bank strategy and aligned with the existing business and operating model. Specialized FinTechs are leading the way in the digital assets space, providing services from custody to trading. Operational and economic implementation of blockchain remains challenging, particularly for traditional financial institutions.
Despite these challenges, over 70% of European institutions have started strategic initiatives in the digital assets space. Institutions should act now and consistently develop their digital asset strategy to position themselves in the growing market for digital assets. Julian Schmeing and Alexandra Kerler, partners at zeb and experts in digital assets, cryptocurrencies, and DLT, emphasize the importance of a clear monetization focus in the development of digital asset strategies.
Large banks are also investing in their own DLT infrastructures, primarily focusing on tokenizing traditional financial instruments. The blockchain technology is being integrated into the financial system, beyond cryptocurrencies like Bitcoin and Ether. As the digital asset market continues to grow, traditional financial institutions that successfully navigate the challenges of operational and economic implementation stand to reap significant rewards.
[1] Chainalysis, "The State of Digital Asset Adoption in 2020"
[2] IBM Blockchain, "IBM Blockchain Platform"
[3] Chainlink, "Chainlink Labs"
[4] Stablecorp, "Stablecorp: The Future of Digital Currencies"
[5] Consensys, "Consensys: Enterprise Solutions"
Other financial institutions may find profitability by exploring decentralized finance (DeFi) solutions, given that these protocols, such as lending, yield farming, and multi-party computation (MPC) wallets, can enhance security in digital banks and fintechs.
To further maximize revenue, institutions could consider offering other services like crypto payment processing, real-time payments, data authentication, stablecoin infrastructure, and tokenization of real assets, which can generate additional income through various fee-based sources.
