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.
Empowerment Through Education
Despite the widespread hype surrounding digital assets, a broad cross-section of the population remains woefully underinformed. A lack of a shared vocabulary is part of the problem; few people can distinguish between altcoins, stablecoins, and Central Bank Digital Currencies (CBDCs) and sometimes use these terms interchangeably. Similarly, there's little understanding of the consumer protections – or lack thereof – backstopping balances held at various crypto exchanges.
SRM believes the best way to empower the industry is through education. This is the motivation behind our Crypto University forum, a free resource for banks and credit unions that was recently named a finalist for NAFCU Service's 2022 Innovation Awards. Once knowledgeable, financial institutions can leverage their "trusted agent" status to educate their consumers.
Digital assets are a rare instance where banks and credit unions may choose to encourage greater regulation since they will inevitably become part of mainstream financial services. Basic rules of the road and established definitions (is Bitcoin a commodity or security?) will likely increase adoption in a more organized manner. This will limit the financial pain endured by consumers dealing with unsupervised players.
Trust Matters in Times of Change
Multiple surveys confirm that financial institutions continue to enjoy market-leading levels of trust from consumers. Studies also show that most consumers would prefer to trade and pay with cryptocurrencies through their financial institution if given a chance. A small but growing number of banks and credit unions have begun to offer these services through third-party partnerships.
Financial institutions have documented significant deposit outflows to crypto exchanges over recent years. Establishing an infrastructure that lets regulated institutions support digital assets can help them defend their deposit bases, benefiting everyone involved. It would also allow them to gain experience with the distributed ledger technologies destined to become the backbone of a future financial system, offering cheaper, faster, and more-secure settlements.
Additional distributed ledger use cases continue to emerge for corporate banking, treasury management, and capital markets. Government agencies will undoubtedly want to position licensed, regulated entities to operate the smart infrastructure required to support them, reinforcing confidence in the system. Digital assets hold promise for greater financial inclusion among the underbanked, given the lower clearing and "know your customer" costs.
The Bottom Line
It will take time for the complete evolution of digital assets, but the overall trajectory is clear – particularly for the underlying technologies that will serve as the foundation for our future financial infrastructure. SRM continues to keep a close watch on this space, and we can expect plenty of activity this fall as more reports tied to the executive order are delivered. We encourage you to contact Larry Pruss (lpruss@srmcorp.com) to sign up for our free Crypto University and stay tuned to SRM for more updates in this ever-changing space.