Cryptocurrency and Community Banks

Bitcoin is currently worth $56,261.30 per share. By the time this article is released, it is more than likely – if not practically guaranteed – to be different than the worth listed. This way of pseudo-anonymously transferring a decentralized digital currency is, for some, the way of the future. Others may find it appealing as a potential long-term investment or store of value. However, many policymakers, economists and regulators, have raised serious concerns about Bitcoin and other cryptocurrencies ranging from its legality to its sizable carbon footprint and energy use. Regardless of which side of this debate someone may be on, banks play a different role entirely.  

As people continue to ask what the future of cryptocurrency will actually be, WBA spoke with Brian Laverdure, vice president of payments and technology policy at the Independent Community Bankers of America (ICBA), on the regulatory policies, challenges, and how banking and payment systems should interact with bitcoin and other cryptocurrencies. 

Bitcoin is worth what the market believes it’s worth. This characteristic hinders its ability to function as an effective means of payment and is enough to make someone question why banks would want anything to do with this market. 

“With these wild swings in valuation and new peaks followed by precipitous declines, it’s reasonable to ask why a company that has its cost structure in U.S. dollars would want to accept payment in bitcoin that could just have a steep decline in value in a matter of hours if not minutes,” Laverdure said. 

As policymakers work to develop effective frameworks to manage risks to the financial system and protect consumers while still supporting innovation with blockchain or digital assets, it will be important for the agencies to harmonize any ensuing regulations to ensure strong, clear, and consistent oversight of cryptocurrency service providers.  

Nevertheless, as public interest in Bitcoin builds, some consumers may look to their financial institutions to help safeguard their digital assets.” 

In July of 2020, the Office of the Comptroller of the Currency (OCC) released an interpretive letter that established banks can offer custody wallet services for cryptocurrency. With this guidance, OCC-regulated banks might decide to pursue new banking services such as secure storage of a digital wallet’s cryptographic keys – a string of data that allows a holder to transfer cryptocurrency. If a holder loses one of its keys or it’s stolen, it’s not recoverable. The three bitcoins worth nearly $200,000 that your friend discovered on a flash drive in the Denny’s parking lot – they’re gone. Forever. 

“It’s still too early to determine the full effect on the banking industry,” Laverdure said. “To date, only a small number of banks are directly engaging in cryptocurrency activities.” 

ICBA has noticed a small uptick following the release of the OCC’s interpretive letter. These have been a handful of national banks announcing services to customers that have expressed an interest in these services. Smaller community banks getting involved in cryptocurrency tell a different story. 

“Some community banks have positioned themselves as early adopters,” said Laverdure. “We’re seeing some new, pioneering cryptocurrency products and services like bitcoin reward programs.” Most community banks are still in the early stages of learning about the technology: How does it work? What are the mechanics? And what are the risks and potential opportunities with cryptocurrencies? “Ultimately, I think it’s just going to take more time before we start to see community banks pursue cryptocurrency products and services.” 

Although the need for banks to invest resources in cryptocurrency is uncertain and dependent on what each bank is witnessing in their communities, it is inarguably a growing trend. A recent survey found that about 1 in 10 Americans own some form of cryptocurrency. 

“It’s very individualistic,” said Laverdure. “Still, it’s important for all community banks to be aware  of technological innovation and the best way to stay on top of it is to learn about it.”  

There are several ways that community banks can be involved with cryptocurrency without actually accepting it. The first, Laverdure suggested, is to simply stay up to date. 

“Awareness is key. Community banks should make an effort to stay aware of new technologies that are impacting financial services, whether that’s cryptocurrency or artificial intelligence, or machine learning, or so many different things."  

He noted it is important to understand the risks, the rewards, and most importantly, the need for it in your community. ICBA’s informational guide on the risks, benefits, and developments of cryptocurrency reminds banks that they should “monitor accounts for cryptocurrency activity” and “engage [their] risk and compliance officers to establish a process to track and assess crypto asset activities and associated risks.” Whether or not your bank is actively participating in crypto exchanges, there’s a good chance your customers might be. Staying aware, and often having a plan, can ensure that banks continue to help their customers by remaining flexible and discussing potential strategies for the various directions the future of cryptocurrency may head.  

“As new payments technology becomes available and accepted, community banks will need to consider the impact of virtual currencies on their institutions and customers,” said Laverdure. “New technologies can present new risks, so it is essential for community banks to have processes and procedures in place to manage the risks associated with virtual currencies.”

By, Alex Paniagua