When cryptocurrencies were first created, they were talked about as something entirely separate from the current financial system. Unregulated, decentralised – a new era where we could operate without banks and fiat currency altogether.
But this was never quite true. There has always been a need for an ‘interoperability’ between fiat and crypto; if you can’t make the initial transfer from fiat into crypto, how will you know the latter’s value?
Crypto exchanges have filled this gap, allowing individuals and businesses to trade cryptocurrencies for other cryptocurrencies, and to buy and sell crypto with fiat currencies. They have been an essential part of the crypto industry’s growth over the past 10 years, yet their expansion has been held back by the rigid payment and banking infrastructure they were provided with.
So why is this? And what’s being done about it?
Why crypto and banking are ‘the odd couple’
Banking is centuries of years old. It holds, manages and moves the majority of the world’s wealth and is only valuable if it keeps that wealth safe. With that pedigree, it is not easy to innovate within banking. Any change must pass rigorous security and technical tests, to make sure they cannot succumb to bad actors or technological faults.
That’s a good thing. Everyone would agree that keeping our money safe has to be a bank’s top priority. Modernisation can’t come at the cost of security or reliable functionality. So what happens when something entirely new, disruptive and fast-moving needs to partner with a rigid, regimented industry? Friction.
For some time, there was very little appetite from banks to be involved in crypto. It was a question of risk vs reward, and when crypto was young and misunderstood, risk felt high and reward felt low. This attitude barrier is beginning to come down, but that doesn’t mean crypto businesses now have a clear path to building the products they want. Legacy technology is now the biggest barrier, making transfers slower, or more expensive, than they should be.
Let’s look at an example. A crypto exchange needs to let users withdraw fiat currency from their wallet to their bank account. Due to crypto’s global nature, they’re going to want to offer this in as many countries as possible, each with different regulations for payments and for crypto businesses.
A banking provider will often offer the crypto exchange one pooled account which all transfers go into and come out of. This means they have to reconcile all these payments manually, with customers including their own referencing information. Not only does this create a lot of operational work, but if the customer puts in the incorrect information payments can go missing.
This is not an uncommon experience and it slows down the entire crypto journey for these customers, making it less likely they will become a regular user. It is not so much a question of appetite, but legacy technology and legacy thinking that can make improvements to this flow more of a challenge.
Infrastructure to the rescue
While this is still the approach for many crypto businesses, there is another way. A more modern payments infrastructure can route payments based on what is needed, making the process much faster.
Crucially, a big part of this can be automated. Payouts can be transferred from each customer’s individual virtual IBAN, removing the need for manual reconciliation. What’s more, modern payment infrastructure gives a business access to more international payment rails, meaning these transfers can occur in real-time. For an industry like crypto, where speed of transactions is so highly valued, this is a huge step forward.
This is just a single example of a challenge and how it can be solved, but there are countless, and many more will arise. Crypto is still developing as an industry and its needs are constantly evolving, and it’s always going to be difficult for giant institutions like banks to keep up with that pace.
Will they catch up? In my opinion, yes. They can see the benefits crypto brings and will want to rise to that challenge. But payment infrastructure providers will usually be on the front foot.
At OpenPayd we built our infrastructure for that exact reason. Bridging that gap between what modern businesses need from financial services and what is currently possible from traditional providers. Working with banks so these companies don’t have to establish those relationships themselves.
Perhaps in the long-term banks will be able to support all crypto businesses with whatever they need. All we can say is, we’re focusing on the now.