By W.B. King
While credit union and bank use-cases for cryptocurrencies have been made for years, they have been mostly academic in approach. But a panel of insiders at this year’s Finastra Forum Americas Enterprise virtual event say the market is changing with real-use cases forcing executives to reconsider banking strategies.
The proliferation of stablecoins, the emergence of central bank digital currencies (CDBC) and fintech integrations “popping up all over the place” in “every aspect of retail finance” has banking executives taking notice, said Director of Enterprise Sales, Payments and Corporate Banking at Finastra James Hutchison.
Stablecoins, as way of explanation, are cryptocurrencies where the price is designed to be attached to a cryptocurrency, fiat money or to exchange-traded commodities.
Hutchison, the moderator, began the conversation asking the panelists: What does the future of crypto payments look like for banks and what does it mean in terms of a financial institution’s building solutions?
But before looking forward and answering Hutchison’s question, Kian Sarreshteh co-founder and CEO at CryptoFi said it’s important to first look back to 2009 when Bitcoin, the most commonly known cryptocurrency, emerged.
“Part of the original thesis was to have a decentralized global payments network, which on paper sounds great, but in production what we’ve seen is that there are a lot of challenges associated with using Bitcoin for payments specifically, which is why we don’t see a lot of Bitcoin payment solutions in production today,” Sarreshteh said.
The Chicago –based CryptoFi offer crypto-as-a-service (CaaS) solutions aimed at bridging the gap between traditional finance and the digital assets of the future, compliant with all regulations.
The DeFi Mullet Movement
One key reason for the lack of Bitcoin payment solutions, Sarreshteh continued, is speed. Trying to buy a cup of coffee at your local deli, he offered, could take up to an hour for the merchant to receive approval of that transaction on the blockchain. And whereas some companies like Tesla have accepted Bitcoin for large purchases like a car, those users are usually willing to wait for the transaction to clear. But currently there is too much daylight between these types of transactions.
Pointing to emerging markets abroad, Sarreshteh said U.S. banking executives should take notice of a new trend where crypto native payments and other faster blockchains are being blended with native legal tender or fiat rails. This way of moving money has earned a new industry moniker harkening back to the 1980s mullet — business in the front and party in the back.
“With a defi mullet you have traditional fintech or finance in the front and then crypto in the back and how that really equates to a real-world payment use case,” Sarreshteh said.
Hutchinson pointed out that the term “defi mullet’ was borrowed from friends at the Bankless Podcast, which touts the motto: The ultimate guide to crypto finance.
Many companies in the crypto space, Sarreshteh added, are working on this hybrid/crypto payment solution where “merchants accept either a fiat payment in which crypto users hold it in their accounts and would be converted to fund that purchase on the backend or [merchants] being able to accept stablecoin as payment.”
Fellow panelist Chris Lane, Head of Business Systems at Silvergate Bank, agreed with Sarreshteh’s assessment of this changing space.
“We are excited to see the proliferation of stablecoins as this industry evolves,” Lane said, adding that Bitcoin hasn’t “played out” as it was initially intended but it is here to stay “in some sense.”
The La Jolla, Calif. -based Silvergate Bank is a Federal Reserve member bank and provider of innovative financial infrastructure solutions and services for the digital currency industry.
As new digital payment technologies continue to emerge, Lane said the “original intent” of Bitcoin is strengthened.
“The concept of improving speed for payments, lowering costs — really trying to build a more financially inclusion payment network is still alive and well and we are excited to be a part of it,” Lane said.
The decentralized payments system, Sarreshteh noted, has one obvious issue, which might take consumers a “long time” to get over.
“Because it is decentralized there is no way to dispute that transaction and disputes are a big issue as to why we might not see blockchain native payments in the near term,” he said of the current construct. “They [consumers] want the ability to claw back those funds used without their authorization.”
One way around this payment dispute issue, he explained, is embracing the defi mullet payments approach. He provided an example of how this merchant/bank/credit union/user relationship would work.
“Whenever a user is holding a Bitcoin in the wallet they have with their bank, they walk into a merchant, swipe their card…if they selected Bitcoin as their primary payment method, then on the back end what would happen is that instead of the Bitcoin being sent from the user to the merchant directly, what would happen is when the user swipes his card there would be an ‘auto sell’ order placed to convert the portion of that Bitcoin to U.S dollars or to a stablecoin to be able to fund that purchase with the merchant,” he said, adding this would be in real-time.
“The merchant would continue to receive the U.S. dollars on the same debit rails, if a debit card was used in that example,” he continued. “There a lot of advantages to that hybrid model — speed up transaction time on smaller transactions and save on costs.”
Buy, Sell and Hold
Finastra’s Hutchinson said “we could go for a long time” talking about the interactions between stablecoins and more “old school” cryptocurrencies like Bitcoin, but pressed on to cover other aspects of this overarching payments concept.
“Current thinking around crypto in your typical financial institution tends to focus on the retail experience and within that retail experience being around ‘buy, sell, hold,’” Hutchinson said. “What other use cases should financial institutions be considering aside from this toe in the water focus we see now in the market?”
Before considering other use cases, Sarreshteh said it is important to understand that “buy, sell, hold” is the “foundation” to offering more crypto services to the end consumer.
“That’s why we built a turnkey infrastructure to allow banks and credit unions in the U.S. to be able to offer buy, sell hold natively through existing web and mobile apps,” he said.
“Once you have that infrastructure in place and your users can buy and sell crypto directly with the funds in their deposit accounts, that unlocks possibilities for other use cases, one of which is payments.”
Lane explained that for the past year, Silvergate Bank has offered a service called “SEN Leverage,” which is a cryptocurrency, in particular Bitcoin, collateralized lending solution.
“Going back to the buy, sell hold concept really being the foundation,” Lane said. “As these assets really get their legs under them in terms of being able to maintain value, the desire and need for people to actually use that as collateral for loans is something that Silvergate is excited about and we think there is hug potential.”
Addressing Hutchinson’s question more directly, Lane said what use cases banks and credit unions should consider are subjective.
“Banks all need to understand what their risk appetite is and that they have the proper tools and controls in place to do some of these things we are talking about,” Lane said.
In Hutchinson’s view, the industry will soon start seeing use cases be defined around corporate banking solutions.
“The feature functionality of any of these cryptocurrencies and blockchains, they are providing real-world benefits that can take time, money and friction out of costs and these processes,” he said. “Running crypto treasuries for corporates that have to pay in certain parts of the world in crypto because of the lack of a stable financial services industry or where fiats can be wildly manipulated…these are some things you don’t think of when you think buy, sell, hold.”
Sarreshteh explained that he has recently had conversations with banks and credit unions about concerns regarding why they don’t want to offer cryptocurrency.
“The current climate we are in right now where we are seeing prices decline in the crypto markets…they don’t want to experience any brand dilution for being blamed for their customers losing money for crypto they have bought from the financial institution,” he said.
One way to combat the buy, sell, hold approach is through a rewards program, he explained.
“You could still offer crypto rewards because if you are receiving crypto as a reward there is really no downside,” he continued. “You’re not actually losing money. I think a lot of people are excited about that right now…to help people ease into cryptocurrency in terms of receiving it as a reward before actually investing in their portfolio.”
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