Cryptocurrencies have experienced remarkable growth in popularity over recent years, leading traditional financial institutions like banks to seek participation in this transformative technology.

This marks a significant shift from their initial skepticism toward the industry. Now, not only individual crypto enthusiasts but also mainstream entities are showing interest. Bitcoin (BTC) reached an all-time high in 2021 at over $60,000 per coin, prompting more firms and individuals to engage with exchanges and trading platforms to acquire Bitcoin.

Effects of growing crypto adoption

As cryptocurrency adoption expands, the demand for regulation has intensified. Panelists at the Digital Asset Summit highlighted the necessity of regulatory clarity before financial institutions can fully commit to the industry. Banks have aggressively partnered with crypto firms over the past year. Chris Tyrer, Head of Fidelity Digital Assets in Europe, stated that these institutions will likely become future gateways to the crypto market.

During Tuesday’s discussion at a Digital Asset Summit organized by Blockworks in London, panelists noted a shift in industry conversations. The focus has moved from blockchain and distributed ledger technology to broader concepts such as Web 3, the metaverse, and creator economies. Many have acknowledged the potential of this technology. The industry’s vision and direction are becoming clearer, solidifying its investment thesis. Tyrer also emphasized the significant demand for crypto services among banks’ traditional client bases.

Accelerated collaboration between TradFi and crypto

Last week, BNY Mellon announced that some institutional clients could now buy Bitcoin and Ether through its crypto custody platform. This allows these groups to hold and transfer these digital assets within the U.S. Mastercard has also launched a program to support banks and fintech firms in offering crypto-related services, including buying and selling cryptocurrencies. The June 2022 New Payments Index revealed that two-thirds of respondents preferred their financial institutions to provide crypto services.

Insights from Blockworks’ panel discussion

During the panel, Alex Demyanov, Managing Director at Bank of America, observed that individuals often prefer building trust with their existing banks instead of switching to unfamiliar institutions. While he acknowledged the decentralized ethos of crypto, he emphasized that working with established banks offers greater security, efficiency, and convenience.

The key takeaway from the panelists was that traditional finance and blockchain technology are destined to integrate. According to Previn Singh of Credit Suisse, the collapse of crypto firms like Three Arrows Capital could have been mitigated if capital buffers were in place, highlighting the importance of this integration.

The role of regulation in crypto’s future

The panelists noted that banks and asset managers have a higher aversion to risk than venture capital-backed fintech firms, especially in an unregulated space. The European Parliament’s ECON Committee recently approved the MiCA bill, which introduces consumer protections, supervision standards, and environmental safeguards for crypto assets. It is set to become law in early 2024.

Meanwhile, the U.S. continues to debate the best regulatory path. An executive order directs government agencies to assess the risks and opportunities of digital assets. A crypto framework has also been released to explore central bank digital currencies (CBDCs), DeFi, and NFTs. Rita Martins, Head of Fintech Partnerships at HSBC, stressed that without clear regulations, large banks would not facilitate clients buying Bitcoin or other cryptos.

Traditional finance’s deepening ties with crypto

As jurisdictions establish regulations, recent initiatives by BNY Mellon and Mastercard illustrate the growing involvement of major institutions in the crypto space. Serhii Zhdanov, CEO of EXMO, commended Mastercard for recognizing the potential of crypto to transcend its current boundaries. Mastercard’s partnerships with crypto firms ensure robust compliance mechanisms, a process Zhdanov believes will lead to every bank offering crypto products soon.

Hugo Feiler, CEO of Minima, pointed out that the perception of crypto as antagonistic to traditional banking is fading. Integration with mainstream payment systems simplifies the process of buying Bitcoin and other cryptocurrencies, bridging the gap between crypto and traditional financial systems.