Five Steps Banks Should Take for a Coherent Digital Asset Strategy


Check out earlier articles in this series: What Banks Should Know about the Cryptocurrency and Digital Assets Market and Real Opportunities for Banks to Engage in Digital Assets.

To initiate business transformation, banks need to understand the demand for crypto products and services and align their offerings with market opportunities. This requires tracking macroeconomic and broader crypto market trends. Banks also need to determine how digital assets fit into their overall business strategy, their role in the value chain and types of services they want to offer. The value proposition for customers must be clear.

Unless traditional banks set out on a clear path in the digital asset economy, they are at risk of being disintermediated by non-bank crypto firms. Before integrating digital assets into their offerings, banks need to set wheels in motion by defining a range of business use cases, designing a near-term roadmap, selecting an appropriate infrastructure and forging the right partnerships.

Growing and Scaling Digital Asset Propositions

In terms of operations, some banks are setting up digital asset units either within existing lines of business, such as BNY Mellon’s digital custody business, which falls within its broader custody business, or as independent business units, such as Fidelity Digital Assets, which comprise dedicated talent and an executive leader, investments and technology.

A bank without a coherent digital asset strategy and associated operating model will soon be left behind and forced to play catch-up in the fast-growing digital currency environment.

Our suggested five-step approach to developing an effective digital asset strategy covers all aspects from consumer needs through governance.

  1. Build and maintain consumer trust. Recent events mean that confidence in digital institutions such as crypto exchanges is at an all-time low. This has prompted many retail and institutional investors interested in these assets to lean toward traditional banks that are typically more trusted by consumers. Because these banks are built on a reliable branch network to provide personalized advisory services, enjoy structured regulatory compliance and consumer protection policies, and therefore have greater perceived stability. To reinforce this trust and confidence, banks need to show that their digital asset services are transparent. They can achieve this via extensive information reporting and disclosures, using sound risk management practices, focusing on regulatory compliance and security and aligning with industry best practices. As digital assets become more widely adopted, building trust and strong customer relationships will play a significant role in determining which banks thrive and which do not.

  2. Determine the appropriate technology investment strategy. An effective crypto strategy is underpinned by a robust and scalable infrastructure for servicing the full lifecycle of digital assets. This can range from trading, custody, lending, collateral management and fund administration to asset servicing, settlement, accounting and payments. Traditional banking infrastructure may lack the required capabilities to offer digital asset-related services and will likely need to be refreshed, or at least upgraded. Based on their role in the digital asset value chain, banks will need to consider adopting different technology investments strategies. These can include building, partnering or acquiring firms which have the required capabilities.

    For example, large banks with in-house resources and blockchain development expertise may build their own DLT systems, wallet solutions and applications. Regional, mid-sized and small banks might find it more cost-effective to work with technology partners, crypto-native custodians or third-party service providers to support their strategic goals. Many technology vendors and services providers are developing solutions to enable banks to use blockchain-as-a-service for integrating digital assets offerings. Banks can also partner with FinTechs that specialize in developing and servicing such capabilities via API-based solutions as part of a plug-and-play model. To meet growing client demand, white-label solutions are a good choice for banks that lack the necessary resources for providing digital asset services, while better equipped peers may choose to design a roadmap for developing in-house solutions.

  3. Evaluate operational readiness and redesign the operating model. To maximize the chance of a successful digital asset strategy, banks must design a target operating model that includes next-generation sourcing, the right talent with specialized skills, appropriate tools and technologies, streamlined processes, the right culture and sound governance. Firms must also evaluate their core banking system capabilities, which may require additional functionalities for digital asset trading, custody, staking, lending, payments, asset tokenization and wealth management. Given the heightened cybersecurity risks associated with digital assets, the operating model needs sufficient risk prevention and detection measures to protect systems and applications, including digital wallets and private keys. A comprehensive suite of next-generation security architecture, tools and programs can monitor and prevent fraud, scam, cyberattacks and data breaches. Unsurprisingly, banks should consider leveraging automation to streamline processes while being careful to maintain interoperability between technology stacks and assets.

  4. Implement effective governance, monitoring and risk controls. Traditional banks entering the digital asset market must implement transparent and robust governance, risk management, compliance and control frameworks that promote safety of operations and stability of the wider financial system. When a bank introduces a new asset class, it must recalibrate these frameworks to account for new risks. Firms must identify and assess emerging risks including those from third-party ecosystem participants. This may require investing in additional resources, processes and tools to mitigate potential risks and integrate them in the internal control environment. It will be critical to continuously monitor and provide comprehensive, actionable reporting for the board and senior executive management (and regulators) relating to the inherent risks and effectiveness of these internal controls.

  5. Build an integrated ecosystem. Based on their business model and desired role in the value chain, banks need to design an integrated partner ecosystem, co-create and take advantage of the broader ecosystem’s capabilities. To address challenges such as talent demand, skills gaps and technical debt, banks will have to explore strategic partnerships and alliances, joint ventures, proprietary platforms, acquisitions and investments in tech start-ups as they scale their digital asset capabilities. Collaboration between FinTechs and traditional banks is becoming increasingly important for acquiring capabilities quickly, co-developing use cases and exploring opportunities across the lifecycle of digital assets. Partnerships can also be established to collaborate and co-innovate with peers and clients, which can help in de-risking exposure and gaining a competitive advantage.

ISG helps banks build, implement and govern digital asset strategies that are right for them. Contact us to discuss your options.