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How Banks Can Safely Do Cryptocurrency

April 30, 2019
Tim Sloane
Aaron McPherson

It’s time for banks to reassess their positions regarding cryptocurrency

New research report by Mercator Advisory Group evaluates several business models for banks and credit unions to engage with cryptocurrency and suggests the safest approaches.
Two large banks, Signature Bank and J.P. Morgan, have officially announced they are supporting cryptocurrencies and each has implemented a closed-loop solution. A new research report from Mercator Advisory Group titled How Banks Can Safely Do Cryptocurrency evaluates the state of cryptocurrencies and considers multiple solution types based on how they fit the existing regulatory structures and evaluates where each solution will push the boundaries of institutional risk.

The report defines and delineates between virtual currencies, digital currencies, cryptocurrencies, private cryptocurrencies, “stablecoins,” and initial coin offerings (ICOs). It explains the risks associated with different cryptocurrency implementations and provides a graphic that makes it easy to comprehend how cryptocurrencies can be called, on the one hand, as the most secure currency in the world while, on the other hand, the news almost weekly reports new criminal acts in which people’s cryptocurrency has been stolen.
With that background information, the report evaluates different approaches a bank might take to deliver a cryptocurrency-based product to its customers while remaining compliant to all existing banking regulations.

“Although I have confidence in the server technology that creates and manages Bitcoin, I remain very skeptical of the industry that has sprung up around it that has enabled so many poorly secured products to be released to consumers. Too many of these were scams to begin with. These are well documented in this report and the risk vectors are exposed,” comments the author of the report, Tim Sloane, VP, Payments Innovation, and Director, Emerging Technologies Advisory Service at Mercator Advisory Group. “However, this report also identifies several implementations that remain well within the banking regulatory framework and would deliver meaningful products to market should the institution feel its customers could benefit from such a contribution.”

This research report has 19 pages and 2 exhibits.

Companies mentioned in this report include: American Express, Coinbase, Ethereum, Fundera, JP Morgan, Ripple, Signature Bank, and Tether.
Highlights of the research report include:

  • Establishes definitions for the many types of digital and cryptocurrencies currently in the market.

  • Evaluates the different approaches to implementing stablecoins.

  • Provides insights into the underlying blockchain implementations and indicates how each should be evaluated to assure it will remain secure.

  • Provides a method for evaluating smart contract environments and identifies those aspects of smart contract technology that likely represent the highest risks associated with safe execution.

  • Suggests how a financial institution could participate in a smart contract environment while minimizing its risks associated with this very immature technology and implementation environment.

  • Identifies technological issues that have allowed so many criminal activities to be perpetrated on cryptocurrency customers.

  • Identifies several approaches that banks can take to become engaged in deploying cryptocurrency solutions.

  • Evaluates the risk of each approach it documents including reputational and other indirect risks.