Is cryptocurrency the future of banking?
For community banks, cryptocurrency may not be quite ready for prime time, but it’s definitely headed in that direction. The popularity of bitcoin, ether and other cryptocurrencies has exploded in recent years.
According to a recent poll by NBC News, 21% of American adults have invested in, traded or used cryptocurrency. And the numbers are even higher for younger people: Half of men between 18 and 49, and 42% of all people between 18 and 34, have dabbled in it. According to the White House, the market capitalization of digital assets, which includes cryptocurrency, recently topped $3 trillion, up from only $14 billion five years ago.
The benefits of cryptocurrency include “better transaction speeds, lower costs, privacy, security and an opportunity to provide underbanked communities with financial services,” according to NBC News. At the same time, an absence of federal oversight “leaves consumers open to scams and dangerous price volatility,” many lawmakers warn. However, that may change in the near future.
Executive order on digital assets
On March 9, 2022, President Biden signed an executive order discussing the administration’s strategies for “addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” The order outlines six objectives:
- Consumer and investor protection. The Department of Treasury and other agencies are directed to develop policy recommendations to protect consumers, investors and businesses as the digital asset sector grows and changes financial markets.
- Financial stability. The Financial Stability Oversight Council is tasked with identifying and mitigating systemic financial risks posed by digital assets and developing appropriate policy recommendations.
- Illicit finance. U.S. government agencies are directed to coordinate their efforts, and work with our international allies and partners, to mitigate the illicit finance and national security risks posed by digital assets.
- U.S. leadership and competitiveness. The Commerce Department is called on to establish a framework to promote U.S. leadership in technology and economic competitiveness in the global financial system.
- Financial inclusion. The U.S. approach to digital asset innovation should be informed by the critical need for safe, affordable and accessible financial services.
- Responsible innovation. The U.S. government must promote responsible digital asset development that prioritizes privacy and security, while combating illicit exploitation and reducing negative climate impacts.
The order also prioritizes research and development of a potential U.S. Central Bank Digital Currency (CBDC) if it’s in the national interest.
The executive order has no immediate effect on community banks. But it signals support of “technological advances that promote responsible development and use of digital assets” and the potential benefits of a CBDC. So, the order may help banks and consumers become more comfortable with cryptocurrency, spurring further growth.
As cryptocurrency becomes more widely accepted, pressure will increase on banks to offer crypto investing or trading services. According to a recent survey by Paxos, a leading blockchain platform, 62% of current cryptocurrency holders would take advantage of crypto investment functionality if their banks offered it. To stay competitive, community banks should familiarize themselves with cryptocurrency and other digital assets, as well as explore potential product and service offerings. They should also monitor developments in the cryptocurrency industry and the government’s regulation of it in the future.
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