How cryptocurrency will change banking transaction in 2021

Although the world of cryptocurrencies is gradually expanding and gaining popularity, traditional institutions are hesitant to adopt the use of these digital assets—believing that their inherent hazards outweigh their potential benefits. However, regulatory organizations such as the Office of the Comptroller of the Currency (OCC) are striving to shift banks’ perspective of digital currencies, believing that these assets could positively push financial institutions to a new era of innovation and efficiency. Recently, the OCC published many interpretive letters clarifying how traditional financial institutions might enter into transactions (or develop services) utilizing digital currency.

This endeavor corresponds with the OCC’s belief that greater regulatory guidelines will help banks become more comfortable with these digital assets. In early January, the OCC declared that national banks and federal savings associations can now use public blockchains and stablecoins to undertake payment activities. This opens the door for banks to have the ability to process payments significantly quicker and without the necessity of a third-party agency. Essentially, this clarifying letter places blockchain networks in the same category as SWIFT, ACH, and FedWire, clearing the door for these networks to be part of the larger banking ecosystem.

Banks may be apprehensive about bitcoin, assuming that transactions involving these assets entail heightened risk and require lengthy and expensive due diligence. But digital currencies can bring many benefits to financial institutions and their customers, they only need to take the leap.

How Banks Can Get Involved in the Cryptocurrency Industry

To avoid being left behind, banks need to find a way to embrace this technology and regard it as a friend rather than an opponent. Cryptocurrency adoption might streamline, expand, and modernize financial services, and there are plenty of recent industry breakthroughs that can assuage banks’ fears about the risks and instead enable them identify the potential benefits.

Custody Services

In July, the OCC ruled that banks and savings associations could provide crypto custody services for consumers, including maintaining unique cryptographic keys connected with accessing private wallets. This indicates that the OCC believes that banks might safely and effectively keep either the cryptocurrency itself, or the key to access crypto on a personal digital wallet for its customers.

Easy Onboarding & Expert Assistance

Banks might assist bring new, less experienced individual investors into the industry by offering tools that would promote the adoption of crypto by their clients. For example, unskilled bitcoin investors may not have the capabilities to set up their own wallet to custody their own cryptocurrency. Rather than keeping their bitcoin “off exchange” or with an unregulated third party, they may find it easier and more secure to hold it within a trustworthy banking institution.

Banks might offer interest-bearing crypto accounts, where users could invest the crypto on the back end or through other financial tools. Banks might reduce some of the burden of investors that aren’t knowledgeable in the subtleties of crypto by acting as a trusted third party that’s well-respected in the finance industry and can keep clients’ funds protected.

AML/KYC Regulations Administered

In 2019, the Financial Crimes Enforcement Network’s (FinCEN) declared that any cryptocurrency transactions and custody services undertaken by crypto companies that are deemed money service organizations must still follow by AML/KYC laws. This will help avoid fraudulent transactions, unlawful conduct, or frauds using these sites. These restrictions could enable banks and larger financial institutions do due diligence on customers involved in crypto transactions, further lowering their fears about the hazards that these transactions bring.

There’s also a potential that blockchain technology may automate AML and KYC verifications. Blockchain could potentially provide for a streamlined view of shared data on persons across banks, loan officers, and other entities. In other words, there may someday be one blockchain that maintains all customer data. This blockchain data could then be employed by all financial institutions, enabling for speedy evaluations of consumers to swiftly discover any red flags implying illicit or criminal behaviour.

Security Concerns

Banks can assist minimize the security concerns of cryptocurrency holders. Hacking of personal wallets and exchanges is a concern for many holders. Well-established institutions might help secure digital currencies against theft or hackers, putting clients’ minds at ease. Bringing cryptocurrencies under bank oversight could assist minimize illegal behavior or the appearance to outsiders that cryptocurrency transactions aren’t secure.

Payments

As mentioned in the most recent OCC letter, banks can leverage public blockchains, including stablecoins, to speed up their payment operations. Blockchain technology provides a faster and less expensive alternative to clearing houses when processing transactions. The clearing and settlements could occur at a considerably faster rate if banks embraced blockchain technology.

Smart Contracts

When entering into an agreement using a smart contract, there’s a lower level of confidence needed among participants because the completion of the transaction relies on computer code instead than an individual’s actions. Banks may strengthen that trust by becoming a reputable third party that employs these smart contracts for mortgages, commercial loans, letters of credit, or other transactions. If the banks don’t become involved with crypto, there is a strong risk that the crypto platforms might take over banks.

Potentials of Cryptocurrency Platform Compared to Traditional banks

Comparing to the present cryptocurrency projects, the banking sector is taking it easy and not rushing to create cryptocurrency-based goods for its consumers. International money transfers can be cheap and nuisance-free with the projection of cryptocurrency. Cryptocurrency-powered money transfers are instant and also economical whereas other bank remittance charges a round fee and takes many days to conduct the transaction. Another key developing trend in bitcoin is smarter yield creation and crypto loans. Deposition of digital assets to create income is becoming the most requested service as numerous platforms are allowing their customers to borrow as well as lend crypto assets.

Investors and depositors of all kinds are entering the crypto business. Therefore, it is high time for the banking sector to get involved with the crypto industry or to compete with the crypto industry by developing up novel technology. Banks will have to get updated with the evolving regulatory requirements. They are needed to modify and adjust according to the ever-changing environment.

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