Elodie Trevillot, Deputy General Manager of Risk and Controls at Banque Delubac & Cie, raises the question of the compatibility between banks and crypto. Opportunities, challenges, and the deconstruction of prejudices related to digital assets are at the heart of this presentation, which was also featured during the France Générosités webinar “Cryptocurrencies validated by our trusted third parties” in October 2023.
The Benefits of Blockchain for Banking
BlockchainA blockchain is a type of distributed ledger technology. It is a huge database formed by blocks,cryptographically linked to each other, containing information such as transactions. These blocks are addedfollowing Lire la suite offers several advantages such as speed, transparency, increased security, and simplification of compliance processes. Specifically, the interest of banks in offering services related to digital assets and blockchain now seems indispensable to meet user needs.
Cross-border Payments
Blockchain technology offers many advantages for cross-border payments: fast and economical. Indeed, payments are instantaneous even when geographical borders are involved. Moreover, the costs associated with transfers can be significantly reduced by avoiding currency conversion feesFees related to operations; they sometimes are distributed to miners. Lire la suite and high costs of international transfers.
Credit Management
Blockchain is a source of opportunities for the syndicated loan market, from mandate management to servicing and tokenization. The elimination of intermediaries and the immediacy of transactions allow a reduction of the granting process from several days to a few hours. For example, JP Morgan’s ONYX platform and BBVA’s syndicated loan platform for businesses. Companies can benefit from a faster and more efficient credit process, allowing them to obtain funding more quickly for their financing needs.
Management of Financial Instruments
The tokenization of assets is a real challenge for economies of scale. Indeed, representing physical or financial assets as digital tokens on a blockchain allows:
- reduction of delays thanks to the instantaneity of the blockchain, thus eliminating the processing delays often encountered by traditional systems,
- elimination of intermediaries, thus reducing associated delays and costs,
- cost reduction through the automation of processes, reduced delays, and intermediaries.
Growing Interest of the French in Crypto
Digital assets are increasingly present in the minds of the French. In 2023, no less than 85% of the French had already heard of these new forms of investment. This growing popularity is confirmed with 26% of the French declaring their intention to acquire digital assets in the future. Moreover, it is interesting to note that 13% of French people over 18 years old have already owned digital assets, such as NFTs or stablecoins. Digital assets are truly emerging as a new asset class that is attracting the interest of the French.
Nearly 30% of people would be ready to switch banks for an institution offering services in digital assets.
Faced with this enthusiasm, banks must understand the importance of adapting to these new uses and seizing the many opportunities offered by this technological innovation. This data highlights the importance for banks to rethink their offerings and provide tailored banking and financial solutions to meet the expectations of their clients and remain competitive in the constantly evolving financial market.
Adaptation of Banks to Digital Assets
To meet the new uses and needs of clients, banks must adapt by evolving:
- Regulatory framework: to offer services related to digital assets in France, banks must obtain a registration or approval as a Digital Asset Service Provider (PSAN),
- Internal mechanisms: towards new tools, training of employees, awareness of new challenges, etc., to meet the specificities of digital assets,
- Risk policy: to integrate the specificities of digital assets (volatilityPrice variation of an asset on a given period. Lire la suite of cryptocurrencies, decentralization of blockchains, cybersecurity, regulatory compliance).
Banque Delubac & Cie supports players in the crypto-assets and web 3 ecosystems to seize the opportunities of this new asset class.
Opportunities for Banking Services Related to Crypto
The growing popularity of cryptocurrencies in France and the possibilities offered by blockchain technology open real opportunities to offer services tailored to client needs.
Management of the Conservation of Digital Assets
Many individuals wish to rely on a trusted third party to ensure the secure conservation of their digital assets. Banks, for their part, have solid technological infrastructures that could meet these needs, particularly in terms of cybersecurity. With their experience in protecting traditional financial assets, banks are well-positioned to offer these services. Their expertise in risk management, regulatory compliance, and data protection can be extended to digital assets. Banks can thus play an essential role in offering reliable and secure digital asset conservation solutions, meeting individuals’ expectations for trust and protection of their investments.
Management of Crypto Asset Purchases and Sales
Banks already have mechanisms to meet client needs in digital assets, particularly through their experience in managing transactions related to financial securities. The key principle in this area, “best execution,” aims to ensure that transactions are carried out in the most advantageous way for clients, considering criteria such as price, speed, and security of execution. This principle is naturally applicable to this new asset class.
Crypto Investment Advisory
Banks already offer value-added services such as investment advice, wealth engineering, etc. In the evolving market and technologies, many clients express the need for advice on investing in digital assets, as part of diversifying their exposure. Indeed
, cryptocurrencies, tokens, and NFTs are gaining popularity as a full-fledged asset class. Naturally, clients are looking to take advantage of this new investment opportunity while needing expertise in this complex environment.
Deconstructing Prejudices Related to Crypto Assets
Mistrust towards crypto-assets largely stems from past scandals and a lack of understanding of this innovative technology, often perceived as complex.
The majority of crypto assets are used legally
The increasing use of crypto-assets for illicit purposes remains below 1% since 2019.
Regulation has aligned the anti-money laundering obligations of digital asset service providers with those of banks:
- obligations to know the customer
- constant monitoring of operations to identify those with an unusual or illicit character
- direct link with the authorities via an obligation to report to TRACFIN (Treatment of Intelligence and Action against Clandestine Financial Circuits)
At the European level, requirements will be standardized with the implementation of the MiCA Directive (Markets in Crypto-Assets). At the international level, regulation governing digital assets tends to become stricter.
Blockchain does not promote anonymity
The blockchain is public. Indeed, it is a distributed ledger system, transparent and accessible to all, where transactions are recorded immutably and verifiable by all network participants. Pseudonymity is common on the blockchain, not to be confused with anonymity. Authorities can even trace transactions back to individuals holding public addresses as in the Silk Road or Bitfinex cases. Thus, authorities have begun to identify IP addresses that are linked to money laundering or sanctions circumvention circuits (USA, UK, OFAC).
Crypto assets are not the preferred tool of money launderers
The main AML-CTF risks come from the use of specific tools or decentralized platforms:
- Mixers: they break the link between the origin address of the transaction and the destination address to ensure the anonymity of certain transactions;
- Decentralized platforms: they do not meet the requirements of regulated platforms and do not always apply rules reducing the risk of money laundering;
- Anonymous assets: digital assets such as Monero or Zcash emphasize the anonymity of transactions. Unlike traditional cryptocurrencies like Bitcoin, they are not recorded on a public blockchain, and the senders, recipients, and transferred amounts are masked.
Blockchain-specific AML-CTF tools
Blockchain analysis tools complement existing customer knowledge and business relationship monitoring tools. The most commonly used blockchain analysis tools, such as Chainalysis, Coinfirm, Scorechain, or TRM, now have more than 5 years of seniority and are capable of:
- multifactorial analysis: entity (the Exchanges), addresses, and transactions.
- integration of risk management rules specific to each user (for example, country risk, high-risk sectors)
- extending the analysis on certain blockchains up to 1000 hops
- identifying risks (for example, identifying mixers)
The features and use of these tools are subject to analysis by authorities in the context of PSAN registration and approval requests.
Sources:
- ADAN KPMG Study, 2023, Web 3 and Crypto in France and Europe: adoption by the general public and applications in industries.
- Chainalysis 2023 Report