A complex and rapidly evolving ecosystem of digital first cryptocurrency-related products has arisen in the financial world. Because it’s digital and highly programmable, crypto, as it is often called, can support a variety of new uses that increasingly resemble products and services offered by traditional financial institutions.
Cryptocurrencies are one of a few types of digital assets representing a new form of money, sometimes referred to as a “digital version of cash controlled by a private cryptographic key.” There are four primary categories of digital assets:
- Cryptocurrencies,
- Stablecoins,
- Central Bank Digital Currencies (CBDC) and
- Non Fungible Tokens (NFTs).
Banks will need to become familiar with and understand each type, but here, we’ll focus on cryptocurrencies.
Cryptocurrencies are independent digital currencies that are not controlled by a government or bank. Examples include Bitcoin and Ethereum. Cryptocurrencies were initially developed and designed to be used to facilitate payment transactions. While there are some companies that accept various cryptocurrencies as payment for goods or services, the volatility of these assets has limited their adoption. Therefore, the primary use for cryptocurrencies today is as an investment in a scarce asset. In fact, a survey published last summer by the University of Chicago found that 13% of Americans had invested in cryptocurrency during the past year.
However, as the market develops, new uses will continue to emerge. One is using cryptocurrencies to send money overseas rather than using traditional bank payment rails or money transfer services. In this use, crypto volatility is problematic. Currency stability is crucial because stability helps merchants and consumers determine a fair price for the goods and services. In 2021, the valuation of Bitcoin, for example, bounced between $30,000 and $68,0000 per bitcoin, with volatility being the only constant since crypto markets never close.
This volatility is why cryptocurrencies are generally defined as a speculative asset class. It remains to be seen how much cryptocurrencies will be a part of future investment portfolios, but generally it’s believed they will continue to lag behind more traditional investments.
Due to the increasing popularity of cryptocurrencies over th last two years, bank regulators are focusing more time on providing clarity to banks about engaging in this new market. For example, in July 2020 the Office of the Comptroller of the Currency issued a letter stating that national banks and federal savings associations have the authority to provide custody services for customers with respect to cryptocurrency and other digital assets.
