The Case for Crypto Payment Platforms in Banks

I wrote a post about why leveraging crypto is the smartest move for individuals sending money cross border, and now I want to talk about why banks should be rushing to introduce the technology for customers to buy and sell crypto directly through their online banking platforms. 

The main reason is so that banks don’t continue to lose customers to fintechs.  That really should be reason enough, but it isn’t the only reason. 

Let me explain some concepts first:

A bank customer has money sitting in the chequing account with your bank.  If they want to buy crypto, then they need to open an account on a crypto exchange and transfer money from their bank account to the exchange.  When it comes time to sell, that money needs to get back into their bank chequing account somehow.  

This process of buying crypto is called “on-ramping” and the process of selling is called “off-ramping” in crypto-bro jargon – for a bank executive, you can think of it as how does the customer leverage their demand deposit account to make international payments/remittances on the blockchain (or even just to buy/sell crypto investments). 

Another term that’s entered the mainstream lexicon thanks to the crypto bros is “fiat currency” – this is the term that differentiates what we think of as normal currencies (e.g., USD, CAD, JPY, EUR) from cryptocurrencies (BTC, ETH, SOL, USDT, USDC).  Worth noting because if you read up on this more, most articles explaining on- and off-ramping will use language referring to converting fiat currencies into cryptocurrencies.

Back to why banks should be implementing this “on- and off-ramping” capability, as I mentioned that becoming antiquated in the new world order as not the only reason for banks.  Introducing this functionality allows banks to reduce overhead costs and operational errors (back in my Treasury days it was almost a daily thing that I had to sign-off on fees incurred due to late settlement on either our side or our counterparties).  Yes, there will be costs with implementation but what if instead of building agents to automate the manual settlement and clearing work, we’re spending that money on reinventing the system?  Money that in turn should reduce reconciliation errors and late payment fees. 

Another element I think brings big value for banks is contingency planning (read: what to do if everything goes to sh*t).  Back in my Treasury days, we would do this type of crisis preparedness testing and included a scenario if SWIFT was ever to go down (SWIFT being essentially the only option for banks to move money globally).  This is a major weakness in any institution that send payments cross border or has business activity in currencies other than their local one – almost all use SWIFT.  It is something I don’t feel had ever been properly addressed other than to acknowledge that if SWIFT was down, no one was making payments, so everything would need to be frozen and then retroactively treated as if it had been settled on time (we call this “good value” in Treasury operations jargon).  Now, imagine if we didn’t have to cause the entire system to freeze, causing our customer and counterparties to be worried about the downstream ripple effects?  Imagine if we created competition, where SWIFT didn’t dominate the market and competition could help reduce operational costs?  Imagine if settlement could be near instantaneous and bills were paid and settled in real-time?  Imagine operational procedures so seamless and scalable operational requirements are no longer the binding constraint to growth?

I won’t get into the political elements of the control that SWIFT can leverage in a global payment system and whether lose of that would have negative implications – but what I will say is that we all thought limiting Russia’s access to SWIFT would bring a swift (pun intended) resolution to the end of the invasion of Ukraine and that didn’t happen.  If you have one take-away from my ramblings, if not convinced that banks should be introducing on- and off-ramping capabilities, it’s that anyone not questioning long held conventional beliefs will be the one that get left behind. 

So, you’re a bank executive and you’re thinking gosh this sounds difficult, expensive, and will require me to hire a lot more IT personnel. You'll be happy to hear banks do not need to build the “ramping” functionality themselves, there are companies that can do this for you.  I won’t go into who/what/how, that’s what the paycheque is for. 

Thoughts and opinions are purely my own, no ChatGPT here.  The above is just a brief conceptual summary, for more specific details, feel free to use ChatGPT.  I’d suggest a prompt along the lines of:

I work for a bank in country [X].  I would like to build a business case to convince senior management to create on-and off-ramping functionality to allow our customers to exchange fiat currency with cryptocurrencies.  Please provide a summary highlighting the pros / cons of implementing this functionality at our bank highlighting the key risks, compliance considerations, and high-level requirements for implementation.

Further research if there are any crypto infrastructure providers that currently operate in my country and can provide crypto ramps for the Bank.  If yes, please highlight the banks they are currently working with and any public information on the relationship (e.g., costs, timeline, concerns, highlights, anything else you think is relevant).  If no, please review international crypto infrastructure providers and prepare a relative comparison highlighting the costs/benefits/opportunities/risks of each.