November 2021 | Point of View

Digital currency is the future—here’s what banks need to know to prepare for decentralized finance

Disruptors will pose risks to traditional banks, but there is still plenty to gain for banks that take steps to incorporate digital currency

Digital currency is the future—here’s what banks need to know to prepare for decentralized finance

The pandemic has opened up the world of payments like no other event in the past 50 years due to the rise in eCommerce shopping, remote service delivery and even cross border transactions. Banks need to make preparations now – or risk losing ground to a range of new, digital-native upstarts.  

In 2020, mobile money accounts grew by 13 percent, with digital platforms like Square, Venmo and Zelle becoming the fastest-growing payment methods in the US. These platforms in turn helped accelerate the rise of another payment innovation: cryptocurrency. Bitcoin’s value surged in the last year by 376%, while others – like Stablecoin – hit the mainstream. Today, cryptocurrency accounts for over $2 trillion in stored value. Governments are entering the fray, too. Central bank digital currencies (CBDCs) are being explored by as many as 86% of the world’s central banks, and we expect the US to launch an eDollar in the next few years.  

Asia – and particularly China – is an indicator of what’s to come in the US as these trends take hold and payments increasingly circumnavigate banks and commercial credit card services. For instance, companies like Alibaba and WeChat, which together have powered 92% of the $41 trillion in mobile transactions by Chinese consumers, are now branching into traditional banking activities, such as treasury and loan products and services.  

Though new payment fintech challengers and innovations pose risks for traditional banks, there’s also plenty to gain by way of increased demand for digital currency investment and custodial services. To differentiate themselves, banks will have to understand their customers’ evolving payment needs and how to best position themselves for success in this new payments landscape. In what follows, we’ll highlight the differences between new payment methods, where banks and their customers stand in terms of digital currency, and outline key next steps banks can take to prepare.  

The new, fourth payments rail  

For years now, banks have been largely focused on three payment rails: traditional payments (e.g., ACH, wire transfers, ATM activities), card payments (e.g., merchant and bank cards, co-branded cards), and, more recently through products like Zelle, and near/real-time payments (including real-time TCH integration and new Fedwire RTP).  

That’s changing. Decentralized finance (or, DeFi) has emerged as a fourth rail. Using technology like the blockchain – and encompassing everything from digital payments to smart contracts to cryptocurrency – DeFi aims to remove intermediaries (like banks) between parties in a financial transaction. DeFi plays to the strengths of many newer fintech companies now disrupting the traditional bank payment ecosystem: modern digital and data platforms that offer enhanced client experiences, platform integration, scale, and support for near and real-time transactions.   

It’s no surprise, then, that DeFi’s growth has been fueled by non-traditional players like tech companies (e.g., Facebook, Amazon, Alibaba, WeChat), venture capital and private investment (e.g., Andreessen Horowitz and fintech (e.g., Paypal, Venmo, Coinbase, Robinhood). There are even new startups, like BlockFi, that offer credit cards, loans, and interest-generating accounts based in digital currency. 

The rise of these companies underscores the need for banks to understand the various components of DeFi. Here are some key areas they should pay close attention to.  


These decentralized currencies are not governed by a central authority and are therefore un-guaranteed and untethered from any kind of sovereign currency system. The blockchain architecture undergirding these currencies circumvents existing payments infrastructure used to funnel payments through credit card services and the main transaction clearing services of Fedwire and ACH. Popular cryptocurrencies include Bitcoin, Ether, XRP and thousands of others. Overall, they represent over $2 trillion of assets worldwide and transact trillions of dollars in value annually. Also worth noting is that they have come under scrutiny for their energy consumption: the total energy usage to check transactions and mine new cryptocurrencies is staggering and will need to be addressed as cryptocurrency evolves and becomes more mainstream. 


These are digital currencies that are tethered to the value of the US dollar or another currency, like a Money Market Fund, and their price is typically targeted at about 1:1. They are used primarily for underwriting cryptocurrency transactions or for similar cross-border transactions where the goal is value stabilization. 

Central Bank Digital Currency (CBDC)

CBDCs are legal tender issued by sovereign banks, but with some added capabilities (many of which are controversial). These include the ability to track transactions, reduce destruction and theft, speed up transfer payments, and provide unbanked people access to the financial system. As Bank of America economist Anna Zhou has written, “CBDCs offer the benefits of improving monetary transactions, without the adverse side effects of crypto currencies.” CBDCs are still being developed and only a few countries have released them as of this writing. 

Where banks (and their customers) stand now  

In two separate surveys conducted this August, we polled bank employees and their customers (those in private wealth management and CFOs) to gauge their sentiment toward and adoption of cryptocurrency. 

Promisingly, there is widespread acceptance of cryptocurrency, with 86% of bank employees and customers reporting either very or somewhat positive sentiment toward it. The vast majority of both also believe it’s here to stay: over the next three years, nearly all of those surveyed expect to be able to accept digital currency, host a digital wallet/account, or engage in DeFi-related activity. As for CFOs, 80% reported actively considering a crypto or digital currency strategy in the 12 to 24 month time horizon.  

Yet while 84% of bank employees say they’re offering cryptocurrency services to at least some extent, these services tend to be relatively basic (i.e., holding a crypto balance). Less than half allow clients to exchange crypto for US dollars (43%) and less than a third allow clients to invest directly in crypto (31%); both are services CFOs and private wealth customers are looking for.  

The main factors holding banks back in this regard, respondents told us, are a lack of digital currency related capabilities and the need to find partners to engage with on cryptocurrency offerings. That’s understandable. As a Financial Times article puts it, banks “face a raft of very real challenges in their efforts to go digital: their technology is not up to it; they can’t move fast; they need to comply with regulations that are currently unclear or not yet in place.” Custody of digital assets is also risky, and they are difficult to insure.  

Getting started 

Even with the challenges banks face in adopting digital currency services, there’s no reason they can’t take initial steps to get started. Here’s how:  

  • Educate. Given the need for future digital currency products and services, now is the time to start educating employees and customers about these options, outlining the bank’s goals, and developing a plan to reach them. Despite widespread interest in cryptocurrency expressed by our survey respondents, almost zero banks have developed an understanding of their own focus areas, top growth prospects, competitive advantage, or client demand. That can easily change, but it has to start with educating executive and business teams and evaluating the client base to understand their awareness and needs.  
  • Explore technologies. Banks need to survey the fintech landscape to identify digital currency and DeFi technology platforms, then evaluate these options against their needs to select solutions that integrate into their target state technology environments.  
  • Keep abreast of regulatory challenges. News detailing digital currency regulations comes out on a near-weekly basis. Understanding current and prospective regulations, potential gray areas, and what might come next is key. For instance, executives should keep abreast of changes to regulations and guidance coming from Federal regulators related to CBDC and cryptocurrency. 
  • Develop a business case for investment. This should include a clear DeFi strategy and roadmap highlighting expected returns, as well as an organizational and change management plan to support operational changes.  


One needs to look no further than the widespread adoption of banks’ mobile apps and self-service options to see that banks have moved fast before – successfully. Now they must capitalize on what they’ve learned in the past to differentiate themselves in an increasingly crowded digital currency market.  

One lesson? Rapid deployment improves a bank’s ability to control their client experience and ability to truly drive their own strategy. But in the realm of digital currency and payments, rapid deployment also has other advantages. As Steven Alexopoulos, an analyst at JP Morgan, notes, “Big Tech possesses the most potent digital platforms due to their access to customer data, but banks have an advantage from deposit franchise, risk management and regulation.” 

We’re starting to see movement. U.S. Bank, for instance, announced in October that it would offer a cryptocurrency custody service to fund managers. Others, like State Street and Northern Trust, have announced similar plans. The proof is there: traditional banks can do this.  

The demand for such services will only continue to increase, as people become more comfortable with digital currency. If they haven’t already done so, now is the time for banks to start laying plans for a digital currency future.  

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