#Business23 Aug

The Stages of Crypto Adoption By Traditional Financial Institutions

Alisa Tkach

Business and crypto – a perfect match or wishful thinking?

Business and crypto – a perfect match or wishful thinking?

Cryptocurrencies were initially developed as an instrument for private users to exchange value, bypassing the oftentimes unprofitable and cumbersome intermediaries, such as banks and other financial gateway providers.

But as the first exchanges emerged and value started accumulating in the cryptocurrency industry as a whole, with blockchain technologies proving their efficiency and potential for application beyond the narrow circles of petty trading and pizza-buying, it quickly became obvious that businesses are the real beneficiaries of decentralization.

Overall, crypto products bear considerably more benefits for businesses than for private users based on their digital nature and decentralization. Boasting lower commissions, higher speeds, and greater flexibility and accessibility, digital assets allow businesses to do away with traditional financial intermediaries and become banks through integrated finance solutions.

Not only they attract new type of customers, cryptocurrency-powered solutions can give companies access to new capital, help enable real-time, accurate revenue-sharing, make money transfers secure and instant, and more.

Adoption Stages For Business Integration

Cryptocurrencies are open for business, since the infrastructure necessary for integrating the variety of DeFi or other solutions is already developed and is simply undergoing transformation and tuning to adjust to the necessities of the various industries. It is only a matter of digital transformation that businesses have to undergo, both in the technical and the mental aspects, to start integrating digital asset-based solutions into their operations. 

What happened with cryptocurrencies is that, in many cases, it has become a bit more of a game of assets than a currency. The main thing to keep in mind is that this business is following consumers. If consumers start to feel that there is some influence they get through cryptocurrencies, everything else will automatically align.

PayPal’s CTO Sri Shivananda

As per the crypto maturity model, the first stage of integration must consider the fundamental pillar of the economy – the banks and the financial system at large, which controls retail, settlement, investment and transactioning worldwide.

Once crypto transfers become mainstream and widely available, synthetic crypto instruments will become available to the larger players of the global economy, such as investment funds and trading platforms, allowing operations with ETFs, futures, and others. This is especially becoming relevant, considering that 46% of people exclusively use digital channels for their financial needs. Moreover, statistic demonstrates that performance of blockchain-related companies is in the stage of stable growth.

And once the major trading platforms and retail become common players on the digital assets market, the further evolution of crypto-related services can be considered and experiments, or exotic instruments, can be developed to suit the demands of both businesses and their clients seeking smoother and more streamlined business-client experiences. These can include custodial services and loyalty programs, as well as OTC services, and others.

Combined, these services, and their derivations, can not only yield profits for businesses and generate value, but also propel them into a new digital economy and open opportunities for new product, service, or entire sector development. Remember, everything is fintech?

Take, for example, the NFT hype. Everyone got fascinated by the idea of owning a piece of modern art coming in the form of a non-fungible token. That, in turn, paved the way for the emerging of new sub-industries such as NFT marketplaces, auctions, DAOs, and digital wallets supporting the new standard. 

A showroom example of tapping into the digital frontier is the advent of metaverses, which combine elements of DeFi, integrated finance, retail, gaming, trading, creativity, tokenization, and much more. With such new prospects being opened before businesses, it is only a matter of proactivity before digital assets become mainstream.

The Digital Asset Opportunities For Businesses

Blockchain technologies provide many opportunities for businesses to leverage the advantages of decentralization. Among them are:

  • Access to an entirely new clientele reliant on cryptocurrencies 
  • Virtually commission-free banking through NFC and crypto-bank card facilities
  • A host of different side-services, such as staking, liquidity mining, and others that form the Decentralized Finance sector

However, the real volumes of liquidity that can be generated by businesses reside in specialized digital assets and instruments tailored and designed specifically for the broader trading arena. 

Among the most highly-anticipated are cryptocurrency ETFs, or Exchange-Traded Funds. These instruments represent an investment fund that tracks the price index of its underlying asset, or basket of assets. Major funds are eagerly waiting for such assets to become widely available and legally recognized, since they represent a major step in the diversification of available market offerings. 

For instance, the Bitwise Crypto Industry Innovators ETF attracted about $45 million in assets less than a month after launch, and the Amplify Transformational Data Sharing ETF, managed with stocks like MicroStrategy and PayPal Holdings Inc., attracted more than $711 million.

Funds are engaged by the volatility of digital assets, but they are never interested in buying a single one cryptocurrency to be part of the entire portfolio. ETFs would allow Bitcoin or other cryptocurrencies to be traded on Nasdaq, instantly allowing funds to start hedging profits from the high level of volatility of their holdings. In addition, ETFs would pave the way for tax efficiency for the businesses involved in trading them, since Bitcoin ETFs would be regulated by the SEC, or any other major regulatory authority, making any manipulations with them in the interest of pension or investments funds legal.

A Matter of Custody

“It is extremely convenient to make payments using cryptocurrencies, given their online nature, speed of transactions, and low commissions involved for transfers.

Various industries can benefit from using the tech in so many different ways: crypto-powered mass payouts for software development companies, crypto on-ramps for gaming, fiat gateways for eCommerce, and a lot more.  Mercuryo’s goal is to design a line of services that meet the demand of all kinds of businesses,”

Arthur Fistov, Mercuryo’s Head of Sales.

But another important feature that makes cryptocurrencies attractive for businesses is the custodial side – the storage of such assets and portfolio management. Speaking of storage – the hardware wallet market alone is expected to reach $795 million by 2026, up three-fold from 2020.

Crypto custody solutions are secure, off-chain storage options for digital assets usually aimed at institutional investors holding large amounts of cryptocurrency.

Mercuryo’s Crypto SaaS solution provides a built-in custody service for banks that want to offer cryptocurrency-related services for their clients but don’t want to handle digital assets themselves. 

Custodial providers can leverage the digital assets frontier to offer businesses a host of services related to the hassle-free purchase, sale and storage of cryptocurrencies at fees that compete greatly with traditional custodial services, such as those offered by banks. In addition, banks are on the losing side in custodial terms when it comes to digital assets, largely because most do not have the legal right to operate such assets while many businesses are seeking operators for their crypto portfolios. 

Custody services for merchants, or merchant services providers, are another major player on the market that is rapidly taking hold of small and medium-sized businesses. The integration of crypto payment gateways into businesses websites and the provision of easy and convenient off-ramp solutions, such as direct peer-to-peer, wallet-to-wallet, wallet-to-account, NFC terminal, or QR code payments is making the use of cryptocurrencies as a means of payments extremely fast, profitable and convenient for both digital currency holders and merchants.  

The Loyalty Factor

Customer loyalty is a valuable commodity on a market. Businesses that launch loyalty programs and reward their clients for repeat-purchases will be ensuring the availability of steady turnovers.

The possibilities for building such systems using virtual coins are many, considering the fact that the infrastructure for deploying such platforms already exists. Unlike with conventional loyalty programs, the incentive instruments already exist in the decentralized industry and give businesses the ability to attract a progressive audience that is focused on digital migration and is capable of providing not only the necessary liquidity, but also the impetus. A recent survey has shown that 44% of retail customers see their loyalty valued in cryptocurrencies, with 28% of millennials owning some form of crypto.

Crediting Businesses

Crypto loans are a highly lucrative and demanded instrument that is rapidly gaining traction and popularity with the advent of the DeFi sector. One of the main reasons for the growing adoption of crypto-lending is the underlying technological basis, which does not require the loaner to present considerable collateral. The lender is also in the green, since the smart contracts regulate the loan and make it virtually risk-free. 

Crypto lending is fundamentally different from traditional lending. A borrower, either a business entity or an individual, uses digital assets, let’s say BTC, as collateral and receives a loan in stablecoins. They do have to lock up more BTC than the overall value of the funds they get due to the volatility factor. Later, when the loan and interest are paid back, they receive not only their collateral but also a profit if the price of BTC has risen. This instrument places banks at a disadvantage with their oftentimes predatory interest rates.

Key Takeways

Crypto adoption by businesses can take place once digital assets are officially recognized as tradable instruments on major exchanges.

“Cryptocurrency regulation is no longer a pipe-dream but an urgency. With the increasing amount of institutional investors coming to the industry, the need in forming a solid, universal legal framework became more relevant than ever. Once the authorities draft such legislation, businesses knowing their interests are protected will be more keen on implementing the new tech,”

Adam Berker, Mercuryo’s Legal Counselor

But before the given stage passes, cryptocurrencies can be used by businesses for transaction processing, loyalty program launches, saving on fees, and lending interest.

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