The central banks worldwide have been concerned for some time about the rising market trends towards cryptocurrencies. Among other institutions, the Bank of England and the Swedish Riksbank have published papers and have declared an interest in the emerging crypto industry.

The resilient nature of Bitcoin continues to astound governments (and central banks) despite years of dismissing it (although the value of one bitcoin has risen quite sharply due to its rising demand).

Despite being decentralized, it has nonetheless verified the free-market economic theory that value is ultimately determined by supply and demand, which are the two fundamental levers of economics.

Even though it isn’t a currency, it might end up serving as a sort of global currency or at least serve as a store of value in the future. While governments have taken steps to control or even ban cryptocurrencies, their efforts have not been enough to stop them.

Over the past year, global sentiment has shifted dramatically towards digital assets. Several major institutions have jumped on board after years of reluctance. Despite long-held views on the viability of digital currencies, JPMorgan CEO Jamie Dimon admitted that his bank’s customers want access to cryptocurrencies. There have been rising prices for some major currencies in 2021, including Bitcoin, Ethereum, and meme-based Dogecoin.

Rising trend of consumers requesting crypto from banks:

The percentage of customers asking for crypto from their banks is on the rise. Based on a study of 3,898 US consumers in December of 2020, Cornerstone Advisors claims that a quarter of US consumers own Bitcoin or other cryptocurrencies. Since early 2020, the price of Bitcoin has increased significantly, so today, that percentage might be even higher. A survey from 2021 revealed that 17% of consumers planned to invest in some form of cryptocurrency.

Crypto owners intend to use their banks to invest in cryptocurrencies to the tune of 60%. Meaning there are 60% of Bitcoin owners who said that they would turn to their financial institution if it would enable them to become involved in cryptocurrencies. Moreover, one-third of the respondents indicated that they would indeed participate. Just 4% of existing crypto owners would avoid switching from their current exchange because they do not want to deal with the hassle of using a different exchange.

Sixty-eight percent of cryptocurrency users find bitcoin-based debit or credit cards to be very attractive. In 2021, about a quarter of consumers who intend to purchase cryptocurrency will be very interested in the idea of Bitcoin rewards, and nearly half were somewhat interested.

Banks moving towards cryptocurrencies:

For the most part, larger institutions are among the 2% that offer crypto-related services. Smaller banks are also using crypto, including:

VAST Bank: VAST claims it has become the first nationally chartered financial institution to purchase and hold digital assets directly from customers’ bank accounts.

Quontic Bank: Quontic Bank launched its Bitcoin Rewards checking account in late 2020 to reward account holders with 1.5% of purchases made with a debit card linked to the account.

First Boulevard:To empower Black Americans with generational wealth, this challenger bank announced that it was launching a crypto API pilot program, which will allow its customers to buy, hold, and trade digital assets.

Banks interested in launching digital currency:

Many institutes now want to launch their own digital currencies. A Bank for International Settlements (BIS) study reported that sixty-percent of the world’s largest central banks are testing digital currencies.

It is important to highlight these critical findings even though this study was published in January of this year but has remained unnoticed by the media. 

These projects attracted much interest. The latest survey indicated that 42% of banks were already testing or experimenting in the area, whereas six out of ten banks have already begun to test the idea of making their currency.

Consequently, more than three-quarters of the institutes surveyed have expressed an interest in creating a digital currency.

Money is currently used by private banks and payment companies most commonly. Nevertheless, a central bank digital currency (or CBDC) is a digital variation of banknotes and coins, giving people the ability to hold and use central bank money.

Out of the world’s largest economies, China is currently in the lead. The European Central Bank and the Bank of England, on the other hand, are taking the situation seriously.

Motives of Central Banks

In addition to maintaining the purchasing power of citizens (this is achieved by controlling inflation), central banks may also be tasked with encouraging economic growth. The common ground they share is that they issue the bills and coins with which individuals, firms, and institutions conduct their daily business.

A study was conducted by BIS research which involved 72% of the world’s population and 91% of global economic growth participating, and over 65 central banks. A total of 21 banks were from developed economies and 44 were are from developing economies, including Mexico.

Among central banks, the main reasons for developing a digital currency were to increase efficiency (access to money), reduce the use of cash, and increase security. However, interest gaps are widened when advanced economies and emerging economies are divided.”

In other words, a central bank in a developing economy has increased reliance on sound finances and efficient payment systems. Digital currencies are essential for developing economies to accelerate financial inclusion, given the fact that many inhabitants are unbanked but can use digital money via a mobile phone.

There is still uncertainty regarding regulation. Among the central banks surveyed, only a quarter have legal authority to issue a digital currency, while 48% are uncertain about the legal framework, and 26% cannot launch an asset that is not physically available.

Most respondents (60%) think a digital currency could be introduced to the public within 1-6 years. By comparison, fewer than 40% of respondents in 2019 believed a coin was likely or possible.

Does it bring competition to crypto?

No, not always. Although the value of cryptocurrencies such as Bitcoin and Ethereum has increased significantly since 2020, central banks regard them as a niche commodity that the general population cannot widely use.

The majority of monetary authorities are watching stablecoins closely. According to a recent poll, two-thirds of central banks are researching how stablecoins can influence financial and monetary stability.

With the announcement of its “Libra” stablecoin in June, Facebook has announced its intentions to use assets to back the stablecoin to avoid volatility and make payments. In government, financial, and monetary circles, claims that the social network would create a currency have been widely rejected. Currently, the project is called Diem, and it is unknown when it will go live.

Despite not having any interest in competing with cryptocurrencies, the monetary authorities may still be interested in limiting their influence on transactions, preventing them from substituting fiat money in the future, and undermining their authority.

The introduction of private cryptocurrencies and new entrants may provide an alternative to fiat money in some transactions. Swift, in a release, notes that the European Central Bank (ECB) believes this will undermine the role played by central banks in the economy, their ability to conduct monetary policy, and their credibility as regulators.

Cryptocurrencies are not one of the motivations behind central banks, but they need to create a currency that can coexist with existing coins, and notes are already a reality. We can only wait and see which central bank will launch its asset first.

Final Thoughts

The key takeaways from the article are: 

  • The banks have shifted their perception of cryptocurrency after seeing an increase in demand and trading volume.
  • The majority of Crypto Consumers are willing to invest in crypto through their banks.
  • Several banks are also interested in launching their digital currencies. Furthermore, it seems as if they want to coexist with cryptocurrencies.
  • FinTech solutions centered on empowering the cryptocurrency and banking sector are highly sought after by financial investors.

The launch of their own digital currencies is on the minds of some banks. Despite this, financial institutions remain primarily interested in cryptocurrencies. Investing in cryptocurrencies and distributed-ledger technologies has grown in popularity among retail and institutional investors.

In the longer run it seems certain that traditional banking products will eventually lose out to crypto goods and services. In the last few quarters, crypto income from FinTech businesses has significantly increased. Investors are interested in the digital currency businesses, as evidenced by Coinbase’s IPO, which valued the company at $85 billion.

The opportunity in the cryptocurrency space is too large for banks to ignore and risk being disrupted by competitors in the decentralized finance space. The developments in 2021 have been very interesting and only time will tell how countries and their central banks are going to tackle the growing demand and interest towards cryptocurrencies.