In the last couple of years, traditional finance players have been paying progressively more attention to the crypto and blockchain sector, despite arguably the all-time lowest trust in the industry. History repeats itself: The foundation for cryptocurrency’s ideology was, in fact, a lack of trust in traditional financial firms after the 2008 financial crisis.
Despite trust issues, major banks like JPMorgan, Citi and others have demonstrated their readiness to work with crypto companies. BNY Mellon presented its own digital assets custodian platform. Payment processing networks like Visa and Mastercard have also reaffirmed their desire to bridge traditional finance and digital assets as they aim to explore blockchain technology applications for their clients. And they are closer to this realization than ever before.
So where does the interest of these companies in crypto stem from, despite this prolonged Crypto Winter? Let’s take a closer look at recent developments.
Despite the showing of interest by prominent TradiFi players, I am not entirely certain that many other TradFi companies are actually seeing the true potential of the crypto industry, considering that these are two very different camps that still have a wide gap in values and practices between them.
When we think of long-standing traditional financial companies, we often imagine conservative big banks and stock exchanges. The average crypto business has a very different image — “nouveau riche” with earnings accumulated in a short period of time.
As these are two very distinct groups, it’s difficult to say where the two are supposed to intersect. It was for this reason, I believe, that many TradFi players ignored the crypto market for a long time despite so much talk about it. Many initially assumed it to be little more than a passing fad. Yet now, these companies are forced to accept that the crypto industry is gradually encroaching on the rest of global finance, with a total market cap rising again above US$1 trillion earlier this year.
At the same time, TradFi companies are coming under increasing pressure from their clientele to not ignore such a large market. Recent research has found that 53% of investors are more likely to take a chance with crypto assets if traditional finance players were to offer services related to this market.
A popular point of view in the crypto industry is that TradFi companies are coming into the crypto market less because of their interest in cryptocurrencies and more out of interest in blockchain technology and that these large corporations, at their core, wish to explore possible new applications of the technology to boost their businesses.
The interest I’ve observed so far stems from payment systems or banks attempting to incorporate blockchain settlements into their networks. Take a look at Swift, for example, which recently announced launching a series of collaborations with financial institutions across the world in order to test how blockchain can be integrated into its existing infrastructure.
But even for such companies, it is easier to turn to a blockchain service provider that would act as a middleman. Most companies, even large ones, do not have the luxury of spending exorbitant resources on figuring out a new technology and making systems and tools based on it all by themselves.
The financial world is now moving toward cryptocurrencies becoming payment instruments. Crypto is convenient and can be exchanged anywhere across the globe without being tied down to banks. In March 2023, Ripple published a report that showcased many members of the global payments industry holding faith in the potential of crypto-enabled payments.
The crypto space still struggles with unscrupulous actors trying to take advantage of financially illiterate people, but such is the downside of convenience. Education and initiatives from governments and regulators may be able to solve these issues in the longer run.
Harsh as Crypto Winter has been, it had a cleansing effect on the crypto industry, with many businesses coming under heavier scrutiny by investors as well as regulators, and holding themselves to a higher standard to survive. Now that the market has eliminated more than a few unsustainable players, traditional businesses are analyzing this space in earnest. This can be seen in the growing number of institutions such as banks, insurance companies, and asset management firms exploring blockchain-based solutions.
Blockchain developers, in turn, are finally seeing a need to create products and services that can more realistically accommodate traditional financial institutions. As new use cases get identified and developed, we will see more attention to this market in the next several years.
In order to get there, however, crypto and TradFi will need global regulators to figure out how to connect them on legal grounds. We are already seeing more of such initiatives, like the MiCA framework that is set to bring crypto regulation and consistent standards across the whole European Union. The sooner that more governments step up to harmonize laws and regulations to bring the two sides together, the faster the crypto adoption process worldwide will become.
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