How financial firms can jump-start their digital asset strategies

Overcoming internal skepticism about digital assets can help create the strategic urgency needed to compete in a fast-moving market.

In brief

• Consumers, businesses and regulators are embracing digital currencies and decentralized finance solutions, causing urgency for financial institutions to adapt.
• Many traditional financial institutions have yet to prioritize digital assets, putting them at a disadvantage in an evolving competitive landscape.
• Taking a future-back approach to strategy building can help financial institutions leverage existing strengths to compete in the digital asset market.

Digital assets have evolved rapidly over the past decade, gaining momentum through a proliferation of new use cases. As their popularity grows, cryptocurrencies, non-fungible tokens (NFTs) and DeFi could disrupt TradFi business models. They also offer promising growth opportunities for those that can adapt to new ways of doing business.

This is a game TradFis can win. For example, one recent study found that 81% of bitcoin holders would move those holdings to a bank if it had secure storage.¹ It’s also one they could lose: a major thrust of DeFi is to use decentralized ledgers to disintermediate TradFis by reducing the need for financial third parties.

Despite the stakes, few institutions have clearly defined digital asset strategies. Many believe that there are too many impediments for digital assets to become widely embraced and are content to wait things out.

FIs that continue to wait for interest in digital assets to wane risk falling further behind. The market capitalization of cryptocurrencies, such as bitcoin, topped $3 trillion in the fourth quarter of 2021,² and DeFi solutions providers are among the FinTech world’s hottest sectors. El Salvador garnered headlines in September as the first country to make bitcoin legal tender,³ while about 80% of central banks are exploring issuing their own digital currencies.⁴

This momentum is a call to action. To succeed in this changing environment, institutions can first debunk the beliefs that have kept them from prioritizing digital assets and then leverage future-back methodologies to identify strategies that give them the best chance to compete.

How TradFis can drive growth by embracing digital assets

Some TradFis have internally debunked these beliefs and begun to craft digital asset strategies that leverage existing strengths and position their businesses for growth. Examples of how early movers are approaching the market include:

1. Being a digital asset custodian

Bank of New York Mellon (BNYM) is creating a multi-asset and digital custody platform for the transfer, safekeeping and issuance of digital assets.¹⁵ Custody is a core business for BNYM, and as digital assets become more widely held, customers are demanding custody solutions, making it a natural fit.

2. Enabling crypto purchases

PayPal has partnered with Paxos to allow its customers to buy, hold and sell bitcoin, Ethereum and other cryptocurrencies through their digital wallets.¹⁶ The relationship promises to raise the profile of cryptocurrencies and accelerate adoption.

3. Facilitating crypto investments

Wells Fargo is among several banks offering bitcoin investments through a partnership with NYDIG.¹⁷ The bank receives placement and servicing fees for referrals to NYDIG.

4. Processing payments

JPMorgan Chase recently announced that it will team with Singapore’s DBS Group and Temasek to form a blockchain payments platform in a bid to ease cross-border payments, trade and currency settlements.¹⁸  The newly established technology company, Partior, will leverage blockchain technology and digitize M1 commercial money. The platform will develop wholesale payment rails based on digitized commercial bank money to enable “atomic” or instantaneous settlement for various kinds of financial transactions.

5. Offering crypto rewards

Mastercard has partnered with Gemini, a cryptocurrency platform, on a credit card that offers real-time crypto rewards on purchases made with bitcoin or other cryptocurrencies.¹⁹ Customers can benefit from any appreciation in the value of their currency holdings.

6. Reimagining trade finance

Commerzbank, Isbank and LBBW became the first banks to execute a commercial cross-border transaction via Marco Polo, a distributed ledger technology-enabled trade finance network.²⁰  The partnership leverages DeFi technology to enhance the efficiency and security of supply chain management and trade financing solutions.

A future-back approach to jump-start digital asset strategies

TradFis that have found success in the digital asset space have embraced systematic, future-back approaches to strategy building centered on four key actions:

Learn the marketplace

Developing a comprehensive understanding of the digital asset ecosystem’s technologies, financial treatments, risks and regulatory environment can spark new thinking and inform strategic discussions.

Envision the future

Hypothesizing a five-year vision that leverages data to answer key strategic questions, such as how best to leverage existing capabilities or which customer segments to target, can help TradFis create superior value propositions. Forging a compelling vision can energize the organization and inspire internal momentum for change.

Validate and iterate hypotheses

Testing the validity of hypotheses through expert interviews and data-driven scenario analyses can help FIs understand how strategies align with existing customer bases and impact operations. A thorough evaluation can give leaders the confidence to pursue the right approach.

Create a strategic road map

Tracing various pathways from the present state to a targeted digital asset strategy can guide the implementation. Evaluating and comparing costs, ease of execution, talent needs and funding requirements for different journeys can help FIs identify and pursue strategies capable of producing a competitive edge.

The primary contributors for this article are David Wax, Senior Director EY-Parthenon EY LLP and  Ellison Smith, EY-Parthenon EY LLP.