From Bitcoin to CryptoKitties: what’s in it for banks?
About five years ago, I was asked if blockchain should be added to the list of priorities at the bank I work back then. I told them it would not impact retail banking within five years.
If they ask me again today, I would probably tell them to wait another three years.
And how about central Banking Digital Currency (CBDC)? By now, the ECB approved a two-year investigation, but we learned from Inge Van Dijk, Director Payments and Market Infrastructures at DNB, that it will take another seven years to have it available for all, if the 2-year assessment is positive.
How about other blockchain-based initiatives? Decentralised finance remains a niche, and if it will transform banking, it is expected to happen with new business models that do not fit within incumbent bank structures from day one. Or do they?
Cryptocurrencies skyrocketed to new heights and plummeted again, showing the tremendous volatility risk to this asset class. Can the support of banks reduce that risk?
NFTs hyped in 2021, opening new markets, opportunities, but also uncertainties and new risks. Should banks offer new services to support that business?
On July 8, we organised The Banking Scene Afterwork around crypto-assets and NFTs, asking ourselves what role retail banks should play. To answer that question, we asked Laurent Marochini, Head of Innovation at Société Générale Securities Services, to join us.
Société Générale has an enormous track record in everything related to blockchain. They were one of the first investors in R3 and the founder of Société Générale Forge. They joined experiments like CBDC of Banque de France, stablecoin Lugh for the French supermarket chain Casino, trade finance with Komgo and WeTrade and more.
It was great to bring him to the table with many other experts in the audience.
Cryptocurrencies: the USA is taking Europe in speed
“I used to make many presentations and talks about cryptocurrency. Early 2021, I remember talking about a capitalisation of the market of $2.4 trillion. I made a new pitch today, and it was at $1.6 trillion. This morning, Ethereum and Bitcoin were down 10%. So I still see much volatility”, explained Laurent.
He noted that these fluctuations are not the biggest determinant in evaluating whether banks should join the crypto market. The massive interest coming from institutional investors since 2020 is a lot more interesting in that respect.
Since 2020, investment funds got inspired by the early hedge funds. Companies like Blackrock, Fidelity, and Morgan Stanley taking stakes in cryptocurrencies have the potential to reduce fluctuations and grow the interest in this asset class. Through investment funds, they make cryptocurrencies more widely available as well.
“Is now the right time for a bank to invest in crypto services? I would say it depends. It depends on what you want to do. Is it just to provide custody services? Yes, as a bank, you can. In the case of execution of transactions, it will be different because of the capital requirements”, said Laurent.
The Basel Committee proposes a high risk-weight for Bitcoin and Ethereum exchanges, in contrast to reserve-backed crypto-assets such as stable coins. For a bank’s balance sheet, this means that banks that do provide trading of, for example, Bitcoin or Ethereum, will need to hold 1 euro in reserve for every euro traded. This applies on Europe, but not for US banks.
On top of the capital requirements, banks face more challenges. KYC and AML, the responsibility of banks to provide transaction finality and implementation of MiFID were highlighted by the audience as a concern.
This explains the limited interest from banks today, with exceptions like Revolut, N26 or BBVA Switzerland. Nevertheless, Laurent believes that cryptocurrencies are here to stay.
He also believes that once cryptocurrencies are more regulated and more widely accepted and applauded, banks can be the trusted partner in the middle. Someone suggested that banks could overcome KYC, AML and transaction finality concerns through collaboration by organising their own ledger in a closed circuit.
It will be exciting to see how this evolves in the coming years.
In the meantime, banks find creative ways to play a role in the crypto space without too much risk. For example, Société Générale offers its customers the aggregation of crypto accounts in the banking app, like for Boursorama customers, which is very easy to set up with publicly available APIs.
What is next?
Non-fungible tokens (NFTs): a purring and growling, but immature business
Wikipedia defines an NFT as: “A non-fungible token (NFT) is a unit of data stored on a blockchain (a digital ledger) which can represent a unique digital item like art. An NFT is a cryptographic token, but unlike cryptocurrencies such as Bitcoin and many network or utility tokens, NFTs are not mutually interchangeable, i.e., not fungible.”
The first NFTs date back from 2017, with crypto kitties, but the real market of NFTs is only six months old, in Laurent’s opinion, with a staggering volume of $2.5 billion in the first half of 2021. The average price was $185/NFT. Today you can buy NBA video highlights, digital art, Sorare football cards, music. Even Tweets are on sale!
The buzz grew, and so did the number of new businesses.
“The transactions in 2020 were near zero”, explained Laurent. “Now, if you’re going to OpenSea, there is an average of 150 million per month, whereas last year, it was nothing. Now we have new accounts. We have new use cases. We just need to have more maturity.”
Explaining what digital art is is peanuts compared to explaining the true added value of adding an NFT to it. What are the rights and obligations linked to an NFT, really? What does it mean if you own Jack Dorsey’s first tweet on Twitter? Can the PNG you purchased as an NFT still be downloaded on the internet?
Many NFTs give access to exclusive activities or digital platforms. But honestly, what is the difference between an NFTs of 1000 copies, each with another number attached to it, and a utility token (a blockchain-based asset people buy with the intention to use for something in the future)?
Right now, it is early to evaluate the market potential for banks, although Laurent believes that progressive banks can help the NFT market to mature. I guess he is right, after all: if there is one strength banks have, it is the capacity to set rules, contracts and agreements, no?
The future will tell which models mature and which will die a silent death, with one particular niche where Laurent sees a high potential already today: gaming, with the audience firmly agreeing with this. Suppose you have scarce in-game collectables on an NFT, they can be pulled out of the game and traded on third-party platforms etc.
Today banks have safes to valuable art, so why can’t they develop a similar service for digital art or other valuable digital collectables? The combined security and convenience of a bank is a unique asset that many wallet providers don’t have, like KYC-proof fall-back solutions if you lose your password, for example.
Crypto assets and NFTs are unexplored territories for most banks, and based on the conversation on July 8, it seems like this will not change anytime soon. On the other hand, banks have a number of assets to bring to the table to improve the maturity of these relatively young markets.
The market is clearly there and evolving fast. The Banking Scene will closely follow these evolutions because more banks will experiment with what they can contribute to bringing crypto-assets and NFTs closer to their customers safely and conveniently.
By the way: if you’re interested in the intersection with gaming, make sure you join us on August 26: Unexplored Territory for Banks: The gaming industry.