In spite of the market turmoil, banks are nonetheless interested in digital assets like DeFi.

Despite the current market conditions, traditional financial institutions continue to demonstrate a variety of use cases for support of digital assets and DeFi capabilities.

Compared to traditional financial service providers, the cryptocurrency market is the Wild West, yet many institutions are showing a lot of interest in digital assets and decentralized finance (DeFi). Particularly this year has been significant for banks looking into digital assets.

Most recently, JPMorgan demonstrated how to leverage DeFi to improve international transactions. The announcement of the debut of BNY Mellon’s Digital Asset Custody Platform, which allows only institutional clients to hold and transfer Bitcoin (BTC) and Ether, the world’s oldest bank, occurred shortly before this (ETH).

Banks “should be no less able to engage in digital-asset-related businesses than nonbanks,” according to The Cleaning House, a US banking association and payment company, in its statement on November 3.

The 2022 Survey of Global Institutional Clients by BNY Mellon reveals growing demand from institutions wishing to access digital assets through trustworthy custodians, even as banks continue to exhibit interest in them.

According to the poll, 271 institutional investors are interested in investing in tokenized assets—nearly all of them, or 91%. According to the poll, the majority of investors use multiple custodians, with 35% doing business with established, established firms.

One of the main factors driving banks’ interest in cryptocurrencies and decentralized finance (DeFi) products is the rise in institutional demand for access to digital assets.

Bobby Zagotta, the CEO of Bitstamp USA, told reporters that the company has recently received a lot of inquiries for its Bitstamp-as-a-Service product, which enables fintechs and conventional financial institutions to provide customers with access to cryptocurrency. He declared:

“Fintech companies questioned Bitstamp about its services to support cryptocurrencies last year. Fintechs have been talking about the drawbacks of not giving customers access to digital assets this year. Banks are realizing that customers want to purchase and trade cryptocurrency, and that if they can’t do so with their banks, they’ll go somewhere else.

Zagotta continued, saying that banks who do not now plan to embrace digital asset offers will lose a sizable portion of the market.

“Banks are understanding that if they don’t enter the market with crypto services, they could be creating a problem with customer retention.”

According to a BNY Mellon poll, 65% of institutions are now interacting with digital-native platforms rather than traditional financial players, which is relevant to Zagotta’s argument. However, BNY Mellon’s research also reveals that 63% of respondents would put up with longer settlement delays if they had to deal with a trusted traditional institution.

Additionally, according to some industry experts, big banks can improve their operations by incorporating bitcoin and decentralized financial solutions. Although the pilot trade conducted by the Monetary Authority of Singapore and JPMorgan was a step toward the adoption of decentralized solutions, it also demonstrates that these organizations are currently evaluating the areas in which DeFi infrastructures are advantageous, according to Colin Butler, the global head and leader of institutional capital at Ethereum layer-2 network Polygon.

Butler remarked:

If the response is “yes,” they would be able to vastly improve the effectiveness of their operations.

Butler said that the proof-of-stake blockchain used by Polygon ensured the speed, security, and cost-effectiveness of the cross-border transaction between the Monetary Authority of Singapore, JPMorgan, and other banking entities. Added him:

“When it comes to DeFi adoption, all of these factors are crucial. DeFi has an advantage over established traditional financial systems because blockchain-based solutions are inherently more efficient than those that have been developed over the previous decades. These frameworks are extremely rigid even though they are still “working.” The most recent developments in DeFi can contribute to making the entire transaction process much more convenient and efficient.

Seamus Donoghue, chief growth officer at METACO, echoed Butler’s assertion when he said that he believes that eventually all financial assets will be represented on distributed ledgers. Large financial institutions use METACO as their provider of digital asset custody. Donoghue stated that it is essential to redesign the financial market network in this context. Added him:

Almost all tier-1 banks are now investing in creating new infrastructure for this reason, not because the cryptocurrency market is currently bearish, but rather because of a much grander vision of how every asset will be represented and how value will be created and exchanged globally.

Donoghue also predicted that banks will one day serve as a conduit for organizations looking to gain access to digital assets and decentralized finance. The reason, according to him, is that traditional financial institutions have substantial balance sheets, consumer trust, a network of other market participants that generates liquidity, as well as a clientele with unmet needs.

Traditional financial institutions are still concerned about regulations, though. According to Mathias Schütz, head of client and technology solutions at SEBA Bank, traditional banks are hesitant to engage with digital assets because of regulatory uncertainty. (SEBA Bank is a digital asset bank based in Switzerland.)

Schütz pointed out that SEBA Bank, which is fully licensed by Swiss regulators, functions as a reliable counterparty for institutions to deal with digital assets in order to resolve this. He stated:

Because of this, SEBA Bank will be able to collaborate with several significant financial institutions in 2022, including LGT Bank, the biggest family-owned private bank in the world.

It is crucial from a consumer’s point of view as well, according to survey results from BNY Mellon, which show that investors are very concerned about the legal and regulatory infrastructures of digital custodians.

FTX US and Binance’s recent developments may have an impact on how traditional financial institutions see digital assets in addition to legislation. Donoghue stated that the FTX US and Binance shakeup may have a short-term impact, however it is still too early to determine the full scope of the disaster’s effects. He declared:

“It might change banks’ policies, at least temporarily, to forego cryptocurrency services and concentrate just on digital securities more widely.”

Eric Berman, a regulatory specialist at Thomson Reuters, stated that he did not believe that this occurrence would hasten bank engagement in digital assets.

“Banking institutions have so far been cautious about cryptocurrency. The FTX US and Binance scenario probably serves as more proof to the banking industry that its pragmatic stance was the right one.

In any case, Berman and Donoghue agree that this incident demonstrates the necessity of greater legal certainty before conventional financial institutions may innovate with digital assets. Donohue continued:

“The recent adverse industry occurrences have highlighted the vital necessity for safe and compliant business practices, regulatory monitoring, and infrastructure. The demand for asset servicing from reputable organizations like regulated international banks has therefore only grown.

It is also crucial to note that the BNY Mellon study looked at how institutional investors have been impacted by the collapse of the Terra ecosystem. According to the research, 9% of institutional asset managers claimed that the Terra collapse had no impact on or changed their intentions for digital assets, while 50% claimed that they had temporarily paused operations to reflect but would soon resume them.

Butler argued that the crypto space has little impact on banks, especially when it comes to decentralized finance, when asked whether the current bear market will impair banks’ interest in digital assets. He cited JPMorgan as an example, saying that they used Polygon to carry out a live cross-currency transaction that included deposits of tokenized Singapore dollar and Japanese yen as well as a mockup of tokenized government bonds.

According to Butler’s assertion, the assets and cryptocurrency prices are unrelated. He declared:

“In essence, financial institutions are exploring for ways to tokenize traditional assets and exchange them digitally. These assets might be anything from bonds and fiat currencies to real estate deeds. In light of the fact that these tokens maintain the value of their “original” assets, the focus here is more on the technology itself than on cryptocurrency prices and bull/bear markets.