Ruslan Kolodyazhny, CTO of the British fintech company Wirex, told in his column for AIN.UA how Ukrainian banks can integrate digital currencies into the list of their financial services.
Why is the Ukrainian market perspective
Despite the fact that cryptocurrencies will fully enter the legal field by the end of 2022, the draft Law on virtual assets is already awaiting second reading, according to which digital currencies are a property instrument, with which it will soon be possible to start working.
In addition, the National bank of Ukraine, together with the Ministry of digital transformation, is actively involved in the development and implementation of the electronic hryvnia — the national digital currency of the Central Bank (Central Bank Digital Currency — CBDC). Unlike bitcoin, e-hryvnia is 1 to 1 backed by the national currency, is considered as a means of payment, and is issued by the NBU. For this, the Ministry of the digital industry has already entered into a partnership with Stellar to provide infrastructure for building CBDC services.
In addition, according to the Chainalysis company, Ukraine ranks first in the world in terms of the digital currency perception index. This index shows how much the population and businesses are aware of digital currencies and how actively they use them. As you can see, in Ukraine this is a fairly common phenomenon, so you can't just turn a blind eye to it. Now there are companies, businesses, and people who actively use cryptocurrencies — you just need to provide them with the necessary tools.
At the same time, to work with digital currencies, banks do not need to integrate with blockchains and look for millions of investments for this. In fact, banks and financial companies already have all the necessary processes, you just need to bring them to the new market. And here's how you can do it.
Banks as infrastructure
Crypto companies can use banks as an infrastructure to provide customers with direct financial services — opening accounts, making payments, and lending, which can become an additional source of profit for banks and financial companies.
Another important part of the banking infrastructure is Open banking. It can also be considered as a separate stream of profit generation for banks, which can be provided through the so-called API services for making payments, exchanging currencies, and opening accounts. For example, Visa recently announced its own API for buying cryptocurrency, and other financial companies could also follow in the footsteps of the payments giant.
Participation in the regulatory sandbox
In the regulatory sandbox of the NBU, there are already about 20 projects for the development of fintech infrastructure in Ukraine. In order for banks and financial companies to remain competitive in the market and continue to develop their services, you need to go to the regulatory Sandbox and offer their services.
Or work to ensure that the market that is being created is manageable in terms of understanding what is happening in it and what services can be offered in the future.
Grant of licenses
For our market, in comparison with the European, this is not the most familiar situation in this area, since banks or licensed financial companies think that a license is a kind of “sacred cow” over which you need to sit and pray. In fact, a license is the same asset, the same instrument that some banks and companies use, and thanks to which they actively cooperate with other players.
This can be seen in the example of neo-banks, which do not have their own licenses but are separate co-brand products operating on the basis of other banks and companies through which they provide their services. And working with digital currencies can also be built on similar partnerships between banks and fintech companies.
Working with stablecoins and CBDC
Working with this type of digital currency involves making payments. Stablecoins are 1 to 1 digital currencies backed by stable currencies such as the dollar or euro. They can already be seen as an active tool for work, and CBDC, digital currencies of central banks, are already functioning in some countries.
For example, in February, Mastercard announced the launch of the world's first CBDC card with Island Pay. At the same time, according to the latest research of the payment giant, 40% of surveyed Mastercard customers plan to use cryptocurrencies to pay for goods and services next year. This means that the global demand for digital assets continues to grow.
As for the digital currencies of central banks, the NBU is now in an active phase of developing e-hryvnia. At the same time, according to the regulator's strategy, the National Bank, together with the Ministry of Finance, plans to introduce CBDC into the CBDC payment landscape by 2024. Therefore, until the moment when e-hryvnia is on the market, banks and fintech companies may already start thinking about how to interact with this means of payment to make a profit.
Custody services
Custody services - services for the storage of digital currencies. There are a huge number of requirements for how vaults should be built to save money. One of the successful projects in Europe is a digital asset storage facility in the Alps based on a historic old military bunker, which is very popular among owners of digital currencies.
Ukraine also has a large asset storage market. Why don't banks use their financial and physical capabilities to provide digital currency management jobs in terms of storing and securing owners' assets. You can do this now.
Remote identification and anti-money laundering
For all of the above services to become a reality, banks only need to change several of their processes. One of which is KYC (Know Your Customer) or standard identification processes that are to be digital and remote.
The second process is AML, the fight against money laundering and terrorist financing. One of the widespread myths is that digital currencies are anonymous money used by criminals to launder money. However, there are a number of products that allow you to completely de-anonymize a transaction. In addition, their use is part of the requirements included in regulatory programs to combat money laundering and terrorist financing. Examples of such products used by top crypto companies and government officials are Elliptic, Chainalysis, Crystal, which monitor and track cryptocurrency transactions. This service provides a risk assessment and allows the compliance department to determine the source of funds and understand whether a particular transaction is worthwhile.
The second part of the AML direction is the so-called Travel rule. All payment systems (SWIFT, SEPA, Faster Payments) that work with digital currencies must use certain data to identify and monitor transactions.
These procedures will be established between all licensed digital currency companies, which means that this is another path that banks and fintech companies can start to explore when expanding their services through digital currency integration.
Joint fintech projects
Combining technologies of banks and fintech companies into joint projects is another way to introduce digital currencies into their services. The best option is to work with relevant companies, relevant solutions that change the attitude of users to services using digital currencies. However, due to the rapidly changing nature of this type of asset, there are no ready-made "box" solutions, since at the time of integration they will already be outdated.
At the same time, cooperation between banks and fintech requires an iterative approach of continuous improvement, which allows covering the specific needs of users. The most effective way to achieve this is to make incremental changes to the service with a partner who already has extensive experience and similar portfolio solutions.
All these processes and solutions will allow the Ukrainian fintech sector to develop, promote new services, and improve the digitalization process. The main thing is to be open to changes in the market and understand that Ukraine is one of the leaders in the use of digital currencies. And if everything that is declared by the regulators and the authorities is implemented, Ukraine will have the opportunity to become one of the centers of Europe for working with digital currencies.
