We live in an age of digital disruption that has accelerated over the last year. Central banks are unleashing record levels of monetary stimulus, while technology continues to rapidly reshape our global economy. Thoughts on the future of digital assets by Rupertus Rothenhäuser.

It has shown us that conventional thinking will not bring the answers for what lies ahead. In the midst of this change, crypto assets are emerging as a "safe-haven" asset for institutional investors looking for alternative stores of value for their investment portfolios.

There is a new asset class emerging – crypto assets. It is an asset class designed for the new digital age we are now entering. The likes of bitcoin and other crypto assets have attracted retail investors and now the attention of institutional investors, who are drawn to the independence these assets enjoy from the policies of central banks and governments, and the blockchain technology that can shape the future of finance.

Fusion of the old and new financial system

Banks will need to both create the infrastructure for crypto assets and respond as trusted advisors to clients who are interested in investing in this asset class. This creates a challenging duality, as the current financial system remains, and this new digital asset finance sector emerges.

Securing the expertise of a specialised partner for trading and investing in crypto assets, and developing a digital asset strategy, is an efficient way to meet this need for innovation, in incremental steps. With a new DLT law addressing many questions around crypto assets effective in February 2021, Switzerland is one of the few countries with regulatory clarity.

A vision of the future from the Crypto Finance Group: Brokerage CEO Rupertus Rothenhäuser.

Why do you think every bank needs a crypto strategy?

Without a strategy for crypto assets, banks will be unable to serve their clients’ needs in the future. Distributed ledger technology – or blockchain – is only just emerging within the banking industry. However, this is a technology that will eventually establish itself at the heart of banking. Without it, banks will miss out on opportunities for efficiency and access at a time when we are entering a new digital and technologically driven age.

Subsequently, the banking industry has not been idle. Banks are taking this new technology very seriously despite the formidable challenges they face. Their focus will be on how they can maintain their competitive edge in an increasingly technologically driven market. If they are unable to allow their clients to bank with crypto assets in the long run, then their clients would eventually switch to a bank that offers these services.

What are the challenges banks face?

As crypto assets become more established, there will be an exponential increase in the number of transactions with crypto assets. As this happens, banks will also face many challenges.
They will need to build the infrastructure to support crypto assets. This will require expertise to do this efficiently. This means addressing the cost pressures as they will need to run their existing banking systems in parallel with this new technology for many years to come.

The other challenge banks face is creating access to the market. They will need products and solutions that allow their clients to invest in them. Whether they are interested in directly trading and transacting, or in asset management with white label products, banks will need an offering for various clients who want to invest in crypto assets. A further step will be expertise in tokenising assets that their clients wish to make bankable and tradable, or as a means to raise finance.

Finally, there is regulatory clarity. Switzerland is one of the few countries that is creating this environment for crypto assets. By working with licenced counterparties, like the Crypto Finance Group, banks receive a viable and efficient path to offering crypto asset services to their clients.

How difficult will it be for banks to implement digital ledger technology?

Integrating crypto assets as part of the banking services on offer will be challenging, as we have already discussed. You cannot plug-and-play distributed ledger technology within a bank. These are large complex organisations. They handle a huge number of financial transactions, which allow our global economy to function.

Every time banks adopt new technology, it usually means a large, multi-year long project with costs running into the hundreds of millions. The emergence of distributed ledger technology for crypto assets is no different. This innovation can be accelerated with experts that know both the blockchain and banking environments and can provide tailored services.

Many different parts of the bank will be affected during a project like this. There is the automation of payments, reporting, custody, and settlement to mention just a few. Updates to a complex web of legacy IT systems that have evolved and the impact this has on the rest of the bank needs to be considered.

That is why it is essential that banks have a group-wide strategy for making digital assets bankable in the future. Without this type of coordination, it could be an extremely lengthy and even more costly process.

What is your outlook for crypto assets?

I think it is important to explain how we got where we are today. The speculative nature of crypto assets in the past, such as bitcoin, has faded quite a lot. Crypto assets are increasingly being embraced by institutional investors as a store of value, a form of digital gold and even as a new safe haven during this period of unprecedented monetary policy stimulus.

It’s worth noting also that this is a market that is no longer poorly regulated. The days of ICO exuberance are over and we are now entering a new era of well-regulated and securitised asset tokenisation. I believe we are in the midst of a crypto asset bull run that is being driven by institutional investors, corporations and financial institutions. Crypto assets have therefore, emerged as a legitimate and important asset class that cannot be ignored.

In the years to come, every bank and regulated financial institution will have a crypto asset strategy. It will be important for their survival and their ability to maintain their competitiveness in an increasingly digital world. It is an exciting time and one that could see the complete transformation of our global banking system. I am proud to be part of it.

Rupertus Rothenhäuser is the CEO of Crypto Broker AG. He has a multi-decade background in the financial markets, forged at EUREX as an options and futures market maker. He drove early adoption in the rising global retail structured product market in Europe and Asia with BNP Paribas; and he led the setup of Boerse Stuttgart cats GmbH, the world’s leading OTC platform for retail structured products. Having helped to build the start-up SIX Digital Exchange (SDX) as the first regulated exchange and CSD for digital assets, Rupertus will champion innovative digital asset services for the Crypto Finance Group’s diverse banking clients.