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We're beginning to get some clarity from the White House regarding its approach to digital assets, including the potential development of a Central Bank Digital Currency (CBDC).

With the release of a wide-ranging report, the White House appears to be embracing digital assets and their potential for transparent, cost-efficient, and inclusive financial services. A background press call provided even more insight into the Biden Administration's thinking.

The Biden Administration's March executive order seeking information on digital assets' usage and security set a flurry of activity into motion. This included a mandate for the Treasury Department to deliver a report on the future of money and payments systems. The agency issued a public request for comment in July, and SRM quickly responded, drawing from our detailed and ongoing coverage of cryptocurrency and other digital assets.

You can read our complete submission here; however, the condensed version below highlights the key points we believe every financial institution should consider as policies toward digital assets take shape.    

The Biden Administration’s Executive Order for digital assets observed that one in six adult Americans are involved with cryptocurrency, while other surveys place this figure closer to one in three. At the same time, a solid majority of Americans indicate they’d prefer to conduct crypto dealings through their financial institution.

This seems like a dream scenario for banks and credit unions looking for opportunities to deepen client relationships and pursue new sources of fee income to replace the overdraft/NSF revenue and interchange that is increasingly under threat.

Standing-room-only crowds during breakout sessions at recent industry conferences nationwide are a strong indicator of financial institutions’ growing interest in cryptocurrency and other digital assets.

The Biden Administration issued its anticipated executive order seeking to coordinate efforts among federal agencies to craft a national policy for digital assets.

While some pundits are worried about the impact of regulation, we assert that this effort brings digital assets, including cryptocurrency, into the mainstream, which should be a positive for financial institutions looking to operate in the space. 

Volatility tends to be a two-way street, so the recent price correction in Bitcoin and other cryptocurrencies shouldn’t come as a shock. Still, that doesn’t take the sting out of the size and speed of the recent decline in Bitcoin, which lost more than half its value between mid-November and late January.

Most of the excitement surrounding cryptocurrency has focused on Bitcoin and similar altcoins. This is understandable, as this asset class accounts for over 95% of the market value assigned to digital currencies and has been responsible for eye-popping returns in recent years.

In late July, the National Credit Union Administration (NCUA) issued a request for comment on the current uses of digital assets and their potential impact on the financial system. The NCUA plans to use this input to help shape its role in safeguarding consumers and the system as these emerging technologies evolve.

The request largely mirrors previous outreach by bank regulators, although the NCUA expanded its scope to include the rapidly growing field of decentralized finance (DeFi). Unfortunately, the credit union response has been muted, so the NCUA extended its deadline for comments to October 27. SRM encourages credit unions to make their voices heard on this strategically important issue.

SRM responded to the NCUA, which you can read here. Our NCUA letter serves as a solid primer on the cryptocurrency topic and includes several examples of existing banking initiatives, the highlights of which we’ll summarize below.

Bitcoin has lost half of its value since reaching an all-time high mid-April. Although one might think this setback would cast a pall over a gathering of cryptocurrency enthusiasts, the overall tone of Coindesk’s Consensus conference in late May remained constructive and upbeat.

For those keeping their eyes on the prize, these two paths are not contradictory. Crypto’s long term value proposition hinges on its adoption as a means of exchange, not its volatile pricing as a speculative asset class. And there’s no sign of slowing down among large financial institutions and scrappy entrepreneurs creating trading and custody platforms and expanding payment capabilities for digital coins. These are the areas where banks and credit unions of all sizes need to take note.

Traditional financial institutions are facing a new wave of crypto-enabled payments disruptions, and many don’t see it coming. Even so, lending as we know it is about to change.

In a recent post, I stressed the importance of banks and credit unions preparing for rapidly emerging financial technologies like CBDCs (central bank digital currencies) and DeFi. This post will take a closer look at what DeFi means for banking as we know it, and encompasses borrowing, lending, investing, payments, and digital wallets.