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The war between banks and blockchain innovators serves no one
Traditional financial institutions have a lot to gain from partnering with digital asset natives – and vice versa. It’s time to realize that potential, writes Michael Wagner, of Oliver Wyman.
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The budding market for digital resources often resembles a turf battle between blockchain natives determined to build a new financial system and traditional institutions more intent on updating the status quo. But if the recent launch of Bitcoin-based Exchange Traded Fund or ETFin the United States is a lead, the big opportunity for banks and other traditional organizations lies in working closer with blockchain natives to drive the trusted financial innovation that consumers want.
Demand for the types of financial products developed by blockchain specialists is significant, according to new research from the Oliver Wyman Forum. Forty percent of 11,000 respondents in a recent survey across 11 countries said they were interested in trading financial markets without intermediaries and using independent systems outside of banks. Additionally, 36% said they were interested in new investment opportunities such as tokenized assets, and 29% expressed interest in using blockchain-based lending and borrowing platforms.
The problem for startups is that consumers place much less trust in the entities that have pioneered blockchain-based innovations in those areas than they do in banks. This may reflect reputational contagion resulting from the collapse of crypto entities such as stablecoin issuer Terraform Labs and exchange FTX.
Partnerships between traditional financial firms and blockchain providers can be a win-win. For digital newbies, connections with established companies can provide the trust consumers are looking for. For banks and finance companies, partnerships can help them enter potentially lucrative new markets and give them access to younger consumers before start-ups conquer them for good. According to the survey, consumers aged 18 to 44 are more than twice as interested in some types of blockchain-based financial innovation than older consumers, and do not have a trusting preference for banks over fintech and crypto platforms .
Until recently there was little direct competition between banks and crypto-native companies, but this has changed with the introduction of bitcoin ETFs. The lines between conventional and blockchain-based finance are likely to blur further in the future, particularly after the approval of ETFs holding ether, the second largest cryptocurrency, behind bitcoin.
A number of conventional banks and asset managers have begun turning bonds, deposits, money market funds and other assets into tokens that can be traded on blockchain. Tokenized assets are estimated to be worth around $6.5 billion in 2023, but some forecasters say the market could reach $4 trillion or more by 2030.
To take advantage of such growth, traditional companies must overcome the so-called innovator’s dilemma: banks, intermediaries and other established players would have to disrupt long-standing business relationships and layers of legacy technology to take full advantage of the speed and efficiency of blockchain and develop a wide range of innovative new products.
So far, many traditional companies have focused their blockchain efforts on reducing costs. Collaboration with blockchain natives can help these institutions focus on revenue growth by creating new products and markets.
Consider bitcoin ETFs. Eleven firms, including some of the largest traditional asset managers, launched their ETFs in the United States in early January after digital asset native Grayscale Investments opened the market by winning a lawsuit against the Securities and Exchange Commission. Most funds have enlisted a cryptocurrency exchange as a custodian to safeguard their bitcoins. The combination has proved popular, with ETFs attracting more than $12 billion in net new funds from investors in the first quarter of 2024.
This collaborative model has great potential. The Monetary Authority of Singapore announced this in November five pilot projects led by a number of leading banks, asset managers and fintechs to test new use cases for the tokenization of currencies, repurchase agreements, asset-backed securities and conventional and alternative investment funds, and to trade them using automated smart contracts and protocols of interoperability from the worlds of Web3 and decentralized finance, or DeFi.
Collaboration doesn’t have to be a one-way street. Consider stablecoins, or cryptocurrencies whose value is pegged to another asset, typically the US dollar. Many issuers, faced with calls for greater transparency following the collapse of TerraUSD in 2022, have turned to traditional financial institutions to custodian their reserve assets and provide audited reporting. This is a significant opportunity, considering the stablecoin market has approximately $150 billion in reserves.
What makes good collaboration necessary? First, a compelling use case: creating a utility or service that is better than existing alternatives and that no one company can provide on its own. In the case of bitcoin ETFs, the goal was to combine exposure to bitcoin with a well-known, regulated financial vehicle.
The ability to access new technologies and customers, and perhaps create a new brand, also plays a critical role in successful collaborations. And it must be a true partnership, drawing strength and value from each of its members. Blockchain lends itself well to collaboration because it is a network technology and networks get stronger as they grow.
A more open, innovative and accessible financial system should be in everyone’s interest. Greater collaboration between traditional financial institutions and blockchain natives can take us there.