6 minute read
Just as the Banking-as-a-Service revolution has commodified banking services to enable any non-bank brand to embed financial services into their products, the crypto craze has spawned the arrival of Crypto-as-a-Service. Today, every company could offer crypto services – but only if they can overcome the hurdles of crypto custody.
The most frequent analogy used to describe Bitcoin is that of digital gold. While gold is not used as currency, it acts as a reserve asset that hedges against inflation and economic uncertainty. This is a role that has been attributed to Bitcoin too, especially in light of the market turbulence in the wake of the COVID pandemic. Akin to finite resources like gold, Bitcoin also acquires part of its economic value through a scarcity effect. Just like there is a limited amount of gold ore to be mined on the planet, there is a limited amount of Bitcoins that can be mined on the blockchain; 21 million to be exact. Simply by virtue of being scarce, gold and Bitcoin derive a desirability that pushes their value beyond their practical use. As a consequence, the value of scarce assets cannot be diluted as easily as that of fiat money, which can be printed at will by central banks.
Bitcoin becomes an established asset class
However, I believe that Bitcoin, and by extension digital assets, have developed into a distinct asset class of their own. Divisible into eight decimal places, Bitcoin is far more liquid compared to popular precious metals such as gold and can be transacted infinitely faster and at a fraction of the cost.
Grayscale, the world’s leading Bitcoin and digital asset manager, already holds over $8bn worth of Bitcoin in its portfolio, with the vast majority of its youngest inflows coming from institutional investors. But crypto-non-native funds are joining the party too. Guggenheim only recently reserved a right to invest 10% of its Macro Opportunities fund into Bitcoin, equating to $530m. At the same time, global heavyweights Larry Fink, founder and CEO of the world’s largest asset manager BlackRock, and Ray Dalio, CEO of one of the world’s most successfully hedge funds, have both asserted their optimism in Bitcoin achieving the status of a global asset class.
These are glaring signs that digital assets and crypto currencies are no longer a niche phenomenon, but a highly sought-after asset class that is cementing its place in hedge fund portfolios around the globe.
However, it’s not just elite investors that want access to the opportunities that lie in Bitcoin and co.
Global financial brands are seeking to ease access to crypto investments with convenient and user-friendly offerings that appeal to ordinary consumers. With its straightforward user experience, mobile broker Robinhood has already upheaved the US market for traditional retail investing; but now they are branching into the blockchain space with a commission-free crypto trading offering. Similarly, Square’s Cash App already started to enable their 30 million-strong user base to invest in Bitcoin back in 2018. The most prominent example for crypto adoption of late is Paypal, with its announcement of adding Bitcoin to its wallet product sending the Bitcoin price on a captivating rally.
All these players have recognized the tremendous opportunity of being the first to get a foot in the door in the crypto market. And they will certainly not be the last!
A boost in customer touchpoints, increased customer stickiness and new revenue streams are just a few of the bounties gleaming at the crypto horizon for crypto adopters. In an increasingly competitive mobile banking market, a user-friendly crypto offering can become a key differentiator to win market share. Bitcoin’s 2020 price rally has only added more pressure on established players to act and incorporate crypto offerings into their product portfolio.
While the market is already becoming mature in the US, European players still have a chance to win first mover advantages.
But they need to be quick. Having said that, building a crypto offering with genuine mass appeal requires a scalable and secure solution for holding their customers private keys on their behalf. If the end customer does not trust the player as a custodian of their crypto assets, then any attempt to enter this market is futile. This presents several challenging hurdles that players must overcome if they want to enter the market with a competitive proposition. I see three key conditions that a good custody solution needs to fulfil in order to achieve true mass appeal.
For your average Joe to adopt your crypto product, the user experience must be in no way inferior to that of a neobank. If the process is any more complex or cumbersome than opening a digital bank account or making a mobile transaction, it’s unlikely you’ll reach a critical mass of users. Tearing users out of their learned habits is not a winning strategy. That means transactions need to be instant, the KYC process needs to be smooth and the user should be able to create the crypto wallet directly in the application, rather than over a third-party exchange or other provider.
For established players to enter, there can be no compliance risks involved in offering a crypto service. As the market matures, so does the regulatory framework around blockchain, which lends confidence to players looking to spearhead into the market. However, more regulation typically also involves more regulatory overhead cost. The crypto custody license introduced in Germany this year sets a level playing field for the market and gives crypto pioneers a lot planning security. At the same time, the investment into applying for and maintaining the license along with all of its compliance requirements acts as a major deterrent for new entrants.
Even established players need to gain and retain the trust of their customers when offering a new asset class. The slightest lapse in security would crumble any confidence your customer base has in your crypto proposition. That’s why the custody infrastructure must not have a single point of failure that can compromise the security of the users’ private keys. There are several storage methods competing in the market, from cold storage hardware modules that remain off the grid entirely to mathematically devised multi-party computation systems that split the key into snippets and distribute them across multiple parties, so that no transaction can be signed without all parties consenting simultaneously. The challenge is then for players offering crypto services to maximize the security of the users’ funds without compromising on an instant and convenient user experience.
These technological and regulatory barriers present new entrants with costs and a go-to-market time that can nip the project in the bud – if you want to build everything on your own.
Even large players are cautious to tackle the significant amount of in-house knowledge required to build and run a secure and highly functional custody solution that is fully compliant on their own. However, the emergence of Custody-as-a-Service players is enabling crypto pioneers to clear these hurdles, changing the stakes in the crypto market entirely. Having a licensed partner that can absorb the regulatory risks and shoulder the technological efforts to build a secure custody infrastructure is a highly attractive option for new entrants looking to hit the ground running.
Many of the aforementioned brands that are leading the way in crypto adoption are relying on API based custody providers to secure their customers’ digital assets, allowing them to focus entirely on their customers. Payment behemoth Paypal for instance and similarly mobile banking champion Revolut have both outsourced their custody infrastructure to specialized third-party custodians.
This development reflects the same shift we have already witnessed in the fiat space with Banking-as-a-Service.
Non-financial players like Samsung are leveraging Banking-as-a-Service platforms to embed digital financial services into their ecosystems, while leaving the regulatory and technical heavy lifting of getting licensed and building an entire banking stack to the experts. Likewise, we can now observe players with strong brands and loyal customers integrating crypto services into their offering via Crypto-as-a-Service platforms, following the same rationale.
Through Banking-as-a-Service, financial services like bank accounts and payment cards have become commodities. Today, virtually any business can integrate banking services into their websites and applications to enrich a given value proposition. Now the time has come for crypto to be commodified, too.
Solaris Digital Assets is spearheading this movement in Europe.
Following a purely API-based approach, we want to enable any business to offer crypto services to their customers. Just as our mother company Solarisbank enabled companies like American Express, Bitwala and Trade Republic to offer banking services to their customers, Solaris Digital assets will now do the same with crypto. With our white-labeled custodial service, we enable businesses to store their customer’s digital assets securely and in full compliance with German anti money laundering regulation, be it Bitcoin, Ether or ERC-20 tokens. This way, players looking to augment their products with innovative crypto services can delegate the regulatory and technological burdens to Solaris Digital Assets, and focus all of their efforts on tailoring their user experience.
As the market cap of digital assets continues to climb and institutional players advance further into crypto territory, the commodification of crypto offers a golden opportunity for European brands to set themselves apart with new financial experiences. The question is simply, who will be the next?