When Digital Assets Disappear into Financial Services

I wonder what the payment rails are for this transaction? It’s a question that, unless you work in finance, you almost certainly never ask. Frankly, a customer couldn’t care less how the money moves, as long as it does so quickly, reliably, seamlessly and cost effectively. To a banking customer, the best infrastructure is the one that they never have to think about.

This is where digital assets infrastructure has an unmatched opportunity to be an integral part of the mature world of finance. The crypto industry has measured its success to date on the number of accounts or wallets opened and the volume of crypto traded. There are approaching 800 million people who use crypto worldwide according to the latest Crypto.com Market Sizing report. Meanwhile, Chainalysis estimates that stablecoins processed $28 trillion in real economic on-chain volume last year. These are critical metrics that have underpinned the industry’s relevancy, taking it from counterculture garage projects to legitimate institutional investment. Perhaps you have noticed that fewer blockchain start-ups use the word ‘project’ now, because project sounds like an experiment. Credibility doesn’t pin itself to speculative projects.

Now crypto is credible, what’s next?

The digital assets sector is merging with, and will continue to grow as a part of, everyday financial services. Faster cross-border payments, wealth platforms where real world assets are tokenized, accessible low-cost remittance through everyday apps, stablecoin settlements to greatly enhance business processes, and new capabilities that complement tried-and-trusted regulated environments.

From a once peripheral position, digital assets will become the core. From adding millions to the wealth of a few early pioneers, to helping millions with their wealth on a daily basis. At Fuze Finance, we took the long-term view that the real strength of digital assets is in its enhanced technology providing truly useful financial capabilities.

From plugged-in product to embedded asset

One of the key stages of transformation since starting Fuze Finance towards the end of 2022, is that crypto products are now being offered through banking apps. This has provided greater access to customers. The next step – and one which we are already working on with financial institutions – is how to build models where digital assets can enhance the whole infrastructure and experience of financial services. This is a huge opportunity and one which will shape the future of finance.

Take the example of a customer making a remittance. Traditionally this has involved many intermediaries and multiple layers of costs, resulting in fees ranging from 4 – 6% or even higher. For institutions and their customers, stablecoin rails can expedite journeys from days to seconds for a fraction of the cost. Embedding blockchain-based systems throughout financial services is not only logical but a significant operational advantage.

Can incumbents seize the opportunity?

Established financial institutions have understandably been somewhat cautious in the upheaval of their systems to make way for blockchain innovation. After all, if everybody shops with you, why do anything differently? But, to draw an analogy, this is a little like the large department stores that went from being the cornerstone of retail to empty relics because of the emergence of online retailers like Amazon.

Right now, the big players have a huge advantage because they already hold the trust of customers, they understand and operate within the right regulations and have the capital. But like the example of the department store, financial institutions cannot rely on the systems of the past. If they do, I do not understate it when I say, it’s game over for them. Acting now on digital assets infrastructure is mission critical.

Choosing the right infrastructure partner

Former Disney CEO, Bob Iger, once wrote in his book The Ride of a Lifetime that: “If you’re in the business of making things, be in the business of making things great.” That’s the challenge facing financial institutions now when it comes to digital assets infrastructure – can this be something that really makes the whole financial system great? Ten years ago, it would have seemed inconceivable. Now, it’s undeniable.

But there is an uncomfortable truth – choosing the wrong partner could be catastrophic for financial institutions. This is why institutional-grade compliance and strong regulated infrastructure is essential. It raises two key questions – firstly, why don’t institutions just build digital assets infrastructure themselves and secondly, what are the important aspects to consider if selecting a third-party vendor?

On the first point, yes institutions can theoretically build themselves, but the costs and resources required for continuous round-the-clock specialist digital asset operations make it impractical. Execution, liquidity, custody, settlement, compliance tooling, and reporting all require engineering talent, capacity and capital. There are just too many layers that can distract from core banking services. Which brings us to the second question and that comes down to choosing the right model for institutional needs.

For institutions, digital asset service models can be white-labelled, fully disclosed or a hybrid between the two. Businesses may have several factors that determine which is most appropriate, such as the jurisdiction of operations and the specific services offered. Responsibilities must also be clearly defined – outsourced technology does not mean outsourcing of accountability.

Therefore, a good relationship between a financial institution and a third-party digital assets vendor can often be determined by the strength of its auditable processes, compliance embedded throughout and multi-level risk controls. Simply put, working with the appropriate digital assets infrastructure provider should enhance systems, not introduce new vulnerabilities. The winning combination is a great synergy between the front-end experience and the underlying architecture.

Through the right partnership, institutions can focus on their strengths while maintaining scrutiny. Ultimately, a bank’s enduring advantage is in building the trust of customers through the quality of its distribution and tailoring relevant financial products.

Solving interoperability and cross-border fragmentation

I have been speaking at several global events recently and one topic keeps cropping up – what are my views on interoperability across borders? Given the fragmentation of banking systems, it’s very unlikely the foreseeable future is one global rail or technical standard. We need infrastructure that allows domestic payment systems, international banking networks and stablecoin settlement to work together.

The practical solution is to build a licensed interoperability layer that connects existing banking infrastructure with stablecoin and digital asset rails, while keeping compliance, settlement and local market requirements intact. In this way, we can solve more than just the movement of value but also ensure that compliance, identity, reporting and local regulatory requirements travel with the transaction. Another key challenge is the final offramp – whether that’s into domestic currency, bank accounts or wallets – this must become cheaper and more efficient.

Moving towards this system can allow institutions to choose the most effective rails for each transaction – and in the context of digital assets disappearing into financial services – without the customer knowing which infrastructure sits underneath it.

Digital assets at the core of financial services

I think we are already at a point where digital assets has reached the mainstream. Younger members of Gen-Z that are in their teens now won’t even consider digital assets to be separate from any other part of finance. For institutions, it’s simply an evolution of processes and strategic improvement of systems.

All stakeholders benefit when money moves faster and more efficiently. And that integration and adoption of digital assets into the way institutions operate may feel like they are disappearing into financial services but I’d argue it’s more than that – they are moving from the edge to the very core of how financial systems are built and run every day. The reality is that delivering the true promise of crypto is finance that just works better.