The American Bankers’ Association (ABA) released a new report that suggests banks are considering partnerships with crypto firms based on increased industry profitability and customer interest. The report is 20 pages long and provides a high level overview of crypto with a glossary, maps crypto business activities to banking products and services. The ABA further suggests crypto use cases for banks with revenue models and regulatory issues for each use case.
The report categorizes crypto assets into four categories: cryptocurrencies, stablecoins, central bank digital currencies, and non-fungible tokens. Decentralized Finance (DeFi) is also mentioned.
Crypto use cases for banks
The crypto use cases listed for banks are:
- Store of Value – The report describes how companies that facilitate Store of Value earn income by buying and selling on their platforms.
- Custodian / Wallet Provider – The report explains that crypto companies allow users to store their cryptocurrencies in a digital wallet and could in theory charge a service fee.
- Interest-bearing accounts – The customer lends their crypto for interest and a bank could earn a fee or a percentage of the crypto earned.
- Payments – Banks might charge a fee for these services similar to a debit or credit card transaction.
- Loans – Banks could provide crypto loans to borrowers for a fee.
- Exchange Trading – Income models include billing transaction fees, registration fees for adding crypto to a platform, and deposit fees.
- Broker-dealer – Income from collecting the spread on transactions for crypto assets classified as securities.
- Insurance – Decentralized insurance allows a group of investors to share the risk among themselves in exchange for the insurance premium.
- Network Utility – Describes utility tokens as providing instant income to the entity creating the token and selling it because it receives either a different form of crypto asset or payment in a traditional currency
- Asset management – This use case for banks would allow a service fee on a crypto wallet.
Regulatory environment for crypto
The report provides insight into crypto offering or selling, money transmission, and tax reporting. The offering or sale of a cryptocurrency is regulated by the SEC only if the offer or sale is constituted as a guarantee by state or federal law or if it is considered a transmission. money under the law of a state or conduct otherwise making the person a money services business under federal law. right. For money transmission, the report explains how FinCEN requires money service business (MSB) registration and state money transfer license (MTL) requirements. For tax returns, it is explained that the IRS treats cryptocurrency as property.
The report also comments on the lack of regulatory clarity for crypto. The report points out that “However, the uncertain regulatory treatment of many crypto assets and the novelty of business models can often create unclear or disparate requirements that can leave significant gaps in regulation and oversight. Readers were provided with an overview of the FDIC’s request for information and OCC’s crypto interpretation letters, although a comment indicates that Acting Controller Michael Hsu has said he will reassess this interpretation. Questions posed by the report include whether cryptos are considered securities and recent FinCEN and Financial Action Task Force (FATF) requirements.
The report also highlights gamification, DeFi, and environmental concerns as a big risk for the industry. As far as gamification goes, and based on the scrutiny faced by toll-free online retail brokers such as Robinhood, the report says crypto is a “likely target” when paired with the unregulated nature of the crypto spot markets. For DeFi, regulators are struggling with who should take responsibility and a reference to SEC Commissioner Hester Peirce’s safe harbor proposal has been made. Finally, according to the report, energy use is high in proof-of-work systems and with the current theme of using the financial system to help mitigate climate change issues, this could be a problem.
Possible partnerships / Crypto solutions
Regarding the bank’s engagement with digital assets, the report states that “… banks are looking for opportunities to enable their customers to access these assets through their banking relationship. Customer interest is driving banks to consider offering access to crypto products. The report refers to a survey conducted by institutional crypto trading and custodian firm NYDIG which found that 80% of Bitcoin holders would move their Bitcoin to a bank.
“With the increasing profitability of the crypto industry, banks have found it more lucrative to take crypto companies as partners and their customers as customers, while crypto companies need banks to provide a access to the payment system to embark and unload escrow deposits, ”the report states. Suggested partnerships include payments where a blockchain-powered payment network could enable faster and more efficient cross-border transactions or how blockchain technology could enable cheaper and more secure lending processes. Other businesses include KYC / AML, digital identity, reporting and banking, where a bank could offer business banking services to crypto companies.
The report can be viewed here on the ABA website and it is noted that updates will be made as changes occur in the industry.