Banks need to grasp the trend of cryptocurrency and make corresponding strategic changes in order to occupy an advantageous position in the world of encrypted digital finance in the future.
Title of the original text: “Banking Business Without Banks”
Written by: Gu Yanxi, founder of the American Liyan Consulting Company, a researcher and practitioner in the blockchain and encrypted digital asset industry
In the Internet era, Bill Gates has a famous saying that is very popular. The general idea is that we will continue to need banking services, but it may not be through banks to do banking services. The development of applications in the financial industry in the Internet era has indeed proved his view to some extent. Due to the great convenience of information exchange brought by the Internet, people are less and less using traditional methods to conduct banking business. This is manifested in the reduction in demand for physical bank branches. More and more banking services are conducted through websites and apps. But such an impact only affects the way the banking business is carried out, and these businesses are still carried out through the bank. The development of third-party payment has led to more and more banking services being completed by institutions other than banks. This formed a direct competitive relationship with the bank. The deposit, loan and foreign exchange business that was previously only available through banks can now be conducted through non-bank institutions.
The Internet only brings convenience for information exchange, and the emergence of blockchain and encrypted digital currency is bringing convenience for value exchange. The influence of the Internet on banks lies in the improvement of efficiency and the convenience of services, while the blockchain and encrypted digital currency provide a new way of conducting banking business. The bank’s deposit, loan and foreign exchange business can be carried out in a more flexible, efficient and diversified manner on top of another financial market infrastructure. This will fundamentally change the foundation of the existing banking industry, and mainstream banking institutions will therefore face even greater challenges. Such a process of change is currently being carried out through the application and promotion of blockchain and digital stable coins.
The origin of current encrypted digital finance starts with Bitcoin. The original intention of Bitcoin design is to provide an electronic cash for direct payment between peers. At the same time that Bitcoin came out, there was also the underlying blockchain technology that supported its operation. With the development of blockchain technology and encrypted digital currency, more types of blockchain underlying and distributed accounting technologies have emerged. On the basis of these underlying technical support, various brands of fiat-based digital stablecoins began to appear, such as USDC and PAX. In the past few years, the continuous growth of the issuance of such digital stablecoins has shown the strong market demand for such stablecoins.
In 2020, the Office of the Comptroller of the Currency of the U.S. banking industry clearly stated that the Federal Bank can provide reserve custody services to issuers of digital stablecoins. This clarifies the position of financial supervision in terms of compliance, so Bank of America can provide various financial services including custody for issuers of digital stablecoins without any worries. Such market development and a clear regulatory attitude will therefore further encourage the development of digital stablecoins. In this field, some leaping developments are currently taking place in the market. First, Diem (formerly Libra) expects to launch a USD-based digital stablecoin as early as January 2021. It is now just waiting for approval from FINMA in Switzerland. This stablecoin runs on the Libra blockchain. Technically speaking, it can reach all users worldwide. Second, PayPal, which has 300 million users worldwide, began to provide its users with encrypted digital currency trading and payment services. The company working with it in this regard is Pax. Pax is a major issuer of current digital dollar stablecoins. Therefore, the development trend of PayPal in this regard is likely to be based on the digital dollar stable currency to provide payment services. Third, Visa recently announced that it will provide USDC-enabled credit cards to 60 million merchants worldwide. The holder of this credit card can pay based on his USDC balance. The USDC digital dollar stablecoin runs on the basis of blockchain support. Therefore, the U.S. dollar is beginning to circulate in the market in a digital form on the underlying infrastructure outside the banking system. And this will fundamentally change the current banking business.
U.S. dollars will flow out of the banking system in an encrypted and digital way, and run under different brands on various blockchains. The decrease in deposits in the bank directly affects its loan business. In the Internet era, third-party payment institutions have adopted similar methods to transfer deposits from the banking system to the accounts of third-party payment institutions. But in the Internet era, third-party payment institutions still use clearing and settlement systems provided by banks. In the era of blockchain, the circulation of digital dollar stablecoins is not on the bank’s clearing and settlement system at all. The services provided by banks in this area are no longer necessary. The lending business based on the digital dollar stable currency is naturally also carried out on the blockchain. Therefore, the development of the digital dollar stable currency actually provides a completely new way to carry out deposit, loan and foreign exchange business. The greater the issuance of digital dollar stablecoins, the more deposits, loans, and foreign exchange businesses on top of it, and the market’s services to banks in this area will naturally decrease. But in this regard, it should be particularly pointed out that such changes in deposits, loans, and foreign exchange businesses are not entirely related to the loss of the banking business. Due to the characteristics of blockchain technology and digital stable currency, it can serve areas where the existing banking system cannot provide services. Therefore, it is also increasing the total market volume of deposit and loan foreign exchange business.
A key difference between the development of encrypted digital finance and the development of the Internet era is the regulatory factor. Since blockchain technology brings about the exchange of value, the influence of regulatory factors in this area is even stronger. The regulatory stance directly affects progress in this regard. In the current US market, the regulatory stance is undergoing fundamental changes. And such changes are directly promoting the development of encrypted digital finance.
Brian Brooks, who is serving as the Acting Administrator of the U.S. Office of the Comptroller of Currency (OCC), was previously the chief legal officer of Coinbase, an encrypted digital currency trading platform. He holds a very cutting-edge view on the development of encrypted digital finance. In this regard, a metaphor he likes to use is to compare a bank with a post office. Before the advent of the Internet, communication between people could only be done through the post office. However, after the advent of the Internet, communication methods have become more efficient and low-cost, and communication contents and forms have become more diverse. Therefore, the communication service function provided by the post office is weakening. Similarly, the emergence of blockchain technology and encrypted digital currency is providing a new type of value exchange method. The deposit, loan and foreign exchange business in banking does not necessarily need to be carried out through the bank. Brian Brooks not only holds this view, but also actively promotes the progress of encrypted digital finance in this regard. In 2020, under his leadership, OCC issued an open letter stating clearly that banks can provide legal services to encrypted digital financial companies, as well as provide reserve custody services for issuers of digital stablecoins. The OCC is currently advancing a nationwide franchise license that allows non-bank institutions to provide payment services. This provides an opportunity for digital dollar stablecoin issuers to provide payment services. The circulation and use of digital dollar stablecoins has a more solid and compliant operating foundation.
To sum up, the development of the digital dollar stablecoin in the market so far has shown that the market has a strong demand for it. The attitude of US banking supervision is promoting the application of encrypted digital finance including digital stable coins. Switzerland’s FINMA’s expected approval of the Diem stablecoin will provide a compliance basis for the circulation and use of digital stablecoins on a global scale. The global circulation and use of digital stablecoins will be an unchangeable trend. This trend will have a huge impact on the existing banking system. Such an impact will be greater than the impact of the Internet on banking business. Bill Gates’ famous statement about banking will be further confirmed.
So is the bank completely passive? of course not. First, banks can issue digital stablecoins based on US dollar fiat currencies. In this way, on the basis of the support of blockchain technology, it can grasp the various advantages brought by this new technology and serve business areas that were previously untouchable. In addition, most importantly, due to changes in infrastructure, transactions that banks were unable to carry out on a large scale can now be carried out at least from a technical point of view, because financial business is entirely based on digital currencies and digital assets, and is Developed on the same infrastructure, so the current banking and securities industries no longer have clear boundaries. The bank can fully participate in transaction business on a large scale by using its advantages in system, infrastructure and users. Moreover, future trading methods will be more diverse, not limited to the current centralized matching transactions and point-to-point over-the-counter transactions between institutions. If banks can grasp this trend and make corresponding strategic changes, banks will still have an advantageous position in the future of encrypted digital finance.
