While more and more people are becoming interested in cryptocurrencies, most of them would prefer to hold them within a bank, the results of a new survey of cryptocurrency holders from EY show.
In fact, 80% of consumers prefer that option, even though most holdings remain on crypto exchanges, given these numbers that will change as banks work their way through the labyrinth of regulatory issues.
EY partner/principal Aaron Byrne said many of his conversations with traditional institutions revolve around how they can become more active in the digital assets space, whether that be from providing investments and other products to consumers or through ancillary services.
Senior director Jochen Kaempfer added that that is an evolution from how such meetings went even a few short years ago. Back then, some still did not quite know what the sector was about, and some who did were not necessarily positive about it.
He estimates 80% are reasonably positive they either want to become involved or could move in that direction. They want to keep their options open. Few of the most prominent players seem to have any concerns and are focused on supporting the ecosystem and developing their own business within it.
Kaempfer said most crypto holders are in the 18-29 age range, and the percentage drops off dramatically in the 60-plus set. No surprise there, but one thing that did catch his eye was that many people with lower incomes also hold cryptocurrencies, possibly because wallets and apps are heavily marketed to younger populations.
Crypto long game
He said that most people also hold cryptocurrency as a longer-term play, especially among older investors. A small percentage of people account for most of the trading, while fewer use it to pay for things or send as remittances. The lower use in remittances could be partially explained by the fact many new wallets mostly only allow holders to buy, hold, or sell cryptocurrencies.
So how do banks become involved in the space? It begins with developing custodial services. That can be accomplished by a third party who assumes responsibility, going to a third party who provides the bank with the technology they need to manage it or taking the very rare step of building it all in-house.
Might some banks buy a custodial company? That could happen among the largest ones, but every one of thousands of banks looking to get involved cannot buy their service provider because there are not that many, Kaempfer said. It is more likely they work with companies to build the specific capabilities they need.
Is the regulatory uncertainty around cryptocurrencies keeping some banks on the sidelines? Byrne said it depends on the type of institution and how they want to become active in the space.
“Some banks are more interested in taking on certain risk profiles, others less so where the board shuts these things down,” Kaempfer added. “So yes, you have a variety of all banks think about the risk, how they want to handle it, and the sorts of risks that they take on themselves.”
Banks have advantage
While there are still some risks and a high burden of regulatory responsibility, banks also have the advantage that consumers see them as providing a high level of protection, Byrne and Kaempfer explained.
“So if and when they’re willing to step further into that space and manage it as they would have to with the right risk and regulatory protocols around KYC and AML,” Byrne said. “And all the rest of that, it’s a protection that they can offer that in some cases may not be offered in other places.”
The main reason so many are willing to move digital assets to a bank is they trust that the bank will hold them and do the right thing, Kaempfer added.
Interestingly, of the people who would NOT move their assets to a bank, the second most popular reason was a lack of trust in mainstream banks, especially in them having the right technologies.
Byrne advised that we must also contrast how fast technologies take off among the population with the pace of regulatory development.
“We’re at a stage where crypto’s reaching higher levels of mass adoption, but the regulation is rolling out in real-time in terms of how are different regulatory bodies going to address it, and whether or not there’s going to be broader expansion into CBDCs,” Byrne said.
“And so, I think part of this is the fact that at this point in time, there is not a kind of safe and sound, holistic model that you could point to and say that’s the one you want to be with. I think it presents opportunity on both sides.”
Libertarian approach not suitable
Cryptocurrency may have libertarian origins, and some of those not trusting a bank to safeguard them may retain those bents. Still, a libertarian approach is not suitable to where we are now, both Byrne and Kaempfer said.
Lose a hard wallet, and you’re out of luck, but misplace your debit card, and you’re back in the saddle in 48 hours.
Plus, most crypto holders already trust some outside entity to hold their digital wealth already, Kaempfer said.
Looking ahead, expect regulators to continue their evaluations even as the industry keeps growing. It’s an interesting dichotomy.
“The regulatory process is going through the evaluation of where and how will they cover this, how they think about managing risks, and what are the expectations and what is the necessary governance,” Byrne said. “All of those things are going to shape some elements of the crypto environment and space.
“However, the crypto environment space is not going to slow down and wait for that. And so I think that as we see more and more extensions of the way that crypto is being used, and digital assets are being deployed and advancement in that technology, the convergence of that with how the broader financial system works and money is regulated and protected; that’s going to, at some point, it’s going to converge, but it may not cover everything.”
Byrne said there’s a convergence of different types of innovations going on right now around decentralized finance. Still, there remain areas that will change the way people can use digital assets in the future that aren’t entirely in place and conceptualized today.
“So I think it’s hard for people to be able to point to something and say ‘this is how I can do it.’ That evolution is going to continue to unfold here and go as it does that that’s going to change the ability for people to pay. So today, as we talked about, everybody holds it or large majority or that for investment. But as mechanisms become available for them to use it in other ways, shapes, places, forms, it’s likely to increase rapidly.”