The Digital Asset Game Plan of Financial Services

The concept of digital assets has been rapidly evolving over the course of the past several years, gaining acceptance as a direct result of the proliferation of new use cases. The old forms of trade finance are in jeopardy because more and more people are using cryptocurrencies, NFTs, and decentralized exchanges.

However, the old guard actually have a good chance of revamping since a recent survey conducted by NYDIG – a holding company that has pioneered the formation of forward-thinking firms in technology and finance – found that over 80% of Bitcoin owners would transfer their crypto savings to a bank if one offered safekeeping services.

Overview of the Current Situation

​​By utilizing decentralized ledgers, one of the primary objectives of DeFi is to do away with the requirement of utilizing financial middlemen, which will result in the disintermediation of TradFis. On the other hand, this is a target might not be able to reach. 

Despite the significance of digital assets, only a small number of companies have committed to building detailed plans for the management of these assets. People are prepared to wait it out because they believe that there are too many barriers for digital assets to become extensively adopted in the mainstream. 

Financial institutions run the danger of falling further behind the curve if they wait for the euphoria surrounding cryptocurrencies to die down. The market capitalization of the crypto market topped $3 trillion during the fourth quarter of 2021, which has resulted in tremendous expansion for companies that supply DeFi solution services. 

In the meantime, 80 percent of central banks are investigating in the possibility of creating their own digital currency, with forty percent already testing proof-of-concept software programs. In addition to this, El Salvador made headlines in September of 2021 when it became the first government in the world to make Bitcoin legal tender. In light of these considerations, the current momentum should not be thrown away.

Institutions can improve their chances of survival in this rapidly evolving market by first debunking the myths that have prevented them from placing a premium on digital assets. This would allow them to utilize  future-back methodologies to determine the strategies that will give them the most significant advantage in order to find the tactics that will provide them with the greatest edge.

Misconceptions Preventing TradFis from Giving Digital Assets Top Priority

- DeFi companies present a risk to TradFis. 

Firms operating in the decentralized finance industry may pose both a threat to and an opportunity for traditional financial institutions. While natives of the digital asset space are eager to leverage TradFis' core competencies and customer bases, forward-thinking TradFis are searching for opportunities to leverage digital asset capabilities and partner with DeFi firms. 

Namely, Visa has recently partnered with over 50 crypto firms to enable users to interact with digital assets. 

- TradFi business models will thrive as long as there are functioning governments and private sector infrastructures. 

There has been a shift in the infrastructure. Digital payments and loans are becoming increasingly commonplace in a wide range of countries. By 2026, about one-fifth of the world's central banks anticipate issuing their own digital currency. 

- There is still time to prepare for the possible arrival of digital assets by becoming familiar with the necessary technology. 

The first three quarters of 2021 will see an investment of more than $15 billion in cryptocurrency and blockchain startups, which is an increase of 384% compared to the total amount invested throughout 2020. This indicates that the longer traditional financial institutions wait, the more of the talent and capability gap will need to be filled.

- It will take a long time for consumers and businesses to widely adopt digital assets. 

Adoption on a massive scale is happening now. More than 20% of investors currently hold some form of digital currency. 

36% of small and medium-sized businesses accept cryptocurrency, and 59% have used it, according to a recent survey. Partnerships between companies like GoCrypto, Binance,  Mastercard, and Bakkt are likely to further increase adoption. 

- Innovation in digital assets will be stifled by regulators before they are widely adopted. 

The Internal Revenue Service (IRS), Federal Reserve (Fed), Commodity Futures Trading Commission (CFTC), and Securities and Exchange Commission (SEC) of the United States have all adopted frameworks and guidance for digital assets. More confidence and enthusiasm could result from stricter oversight by regulators.

- Firms dealing in digital assets are typically young and immature. 

The rapid expansion of the digital asset ecosystem has been made possible by the influx of investment capital. Regulatory bodies, central banks, and significant TradFis are all setting themselves up for the long haul to lend to their credibility.

For instance, the post-Merge Ethereum network will soon be able to process 15,000 transactions per second, matching the speed of any central bank processing system.

A retroactive 4-step plan for launching digital asset strategies 

Successful TradFis in the digital asset space have adopted systematic, future-back methods to strategy formulation, based on four essential pillars. 

Studying the market 

Understanding the technology, financial treatments, dangers, and regulatory environment of the digital asset ecosystem can inspire new ideas and guide strategy.

Construct a plan of action 

The implementation process can be steered by tracing potential routes from the current condition to the desired digital asset strategy. Financial institutions (FIs) can find strategies that can provide them an edge in the market by analyzing and contrasting the costs, ease of execution, talent requirements, and capital requirements. 

Imagine what the future holds

TradFis can benefit from hypothesizing a five-year vision by utilizing data to address critical strategic questions like how to maximize current capabilities and which client segments to focus on. Creating a compelling vision may invigorate a company and generate the internal momentum needed to implement change.

Test and refine the hypotheses

FIs can gain insight into the compatibility of their plans with their existing clientele and their effects on business by conducting expert interviews and data-driven scenario analysis to test their ideas. Leaders might gain assurance that they are taking the proper course of action after conducting thorough research.

Understanding the Growing Potential of Digital Assets and how they can be used by TradFis 

Some TradFis have disproved the misconceptions we covered and are now developing digital asset plans to build on their competitive advantages. Thus, here are some of the methods adopted by market pioneers, which are proven to provide positive results.

Processing payments 

JPMorgan Chase has announced that it will collaborate with Singapore’s DBS Group and Temasek to develop a blockchain payments platform in a bid to ease cross-border payments, commerce, and currency settlements. 

Partior, a recently founded IT firm, plans to digitize M1 commercial currency using blockchain technology. To facilitate instantaneous, or "atomic," settlement for a wide range of financial transactions, the platform will build wholesale payment rails using digitized commercial bank money. 

Facilitating the use of cryptocurrency for shopping 

With the help of Paxos, PayPal clients may now use their digital wallets to purchase, store, and trade cryptocurrencies. The alliance promises to enhance the profile of cryptocurrencies and accelerate adoption. 

Making cryptocurrency investments easier 

Through its cooperation with NYDIG, Wells Fargo is among numerous banks now offering bitcoin investments to their clients. When clients are referred to NYDIG by the bank, the bank earns placement and servicing fees. 

Granting rewards 

The cryptocurrency exchange Gemini and the credit card company Mastercard have joined up to introduce a new credit card that provides instant cryptocurrency rewards for purchases of cryptocurrencies. Customers have the potential to profit from an increase in the value of their currency.

Being a trusted keeper of digital assets 

In order to facilitate the trading, storage, and distribution of digital assets, Bank of New York Mellon (BNYM) is developing a multi-asset and digital custody platform. BNYM's primary focus is custody, and the growing popularity of digital assets has led to an increase in requests for custodial services. 

Final word

Financial institutions who are able to overcome traditionalist mindsets and make use of future-back methodologies in order to prioritize digital asset strategies will be in a position to experience expansion as digital assets continue to acquire traction.

In spite of the fact that global macroeconomic events are having an effect on markets, the market for digital assets seems to be expanding. It is difficult to disregard cryptocurrency, whether this is because of an increasing number of institutional investors or because new markets, such as decentralized finance and non-fiat currencies are expanding. 

A study conducted by Galaxy Digital found that over $33 billion in venture capital was invested in blockchain and cryptocurrency companies in just one year. In 2021, there will be more private investment capital invested than there was in the preceding six years.

Additionally, giving the general public secure and regulated access to DeFi would restore traditional finance to its former position of dominance. It will ultimately make the DeFi industry more customer-friendly. 

As DeFi continues to consume TradFi, it may become apparent that neither can survive without the other. TradFi supports firms in raising capital to accelerate their operation, but it is also, in many instances, a byproduct of credit.