The rise of Digital Assets — Cryptocurrency Kraken gets a Banking Licence

Bitcoin reaches an all-time high, signalling an accelerating trend of value in Digital assets.

The convergence of digital and physical assets is changing the world’s economy. This article focuses on the disruption caused by Digital and Physical assets’ convergence. Kraken, a cryptocurrency exchange platform, was granted a banking License in Wyoming (USA). This license will enable Kraken to build a bridge between the Digital Asset and the Physical/fiat Assets. To understand the importance of this move, we need to breakdown the following concepts: Digital Assets, Blockchain technology, and Cryptocurrencies.

First, let us talk about the elephant in the room: Bitcoin. Bitcoin is probably the most popular cryptocurrency and a fascinating case study for Financial Services.

The concept of cryptocurrency emerged during the GFC when the “subprime” crisis had an impact on the real economy. During this period, the trust in financial institutions was at its lowest point.

Bitcoin became a highly valued (and volatile) asset class from a counterculture concept. As of when writing this article, one Bitcoin is worth USD 34,581. Many factors can explain the rise of cryptocurrencies: Low-interest rates facilitated by Quantitative Easing (QE) are key factors. Another factor is at play, which should not be underestimated. This trend is the rise in the value of “Digital Assets,” a concept we will discuss next.

A Digital Asset, in opposition to a Physical Asset, is intangible in the material world but holds intrinsic value. There are multiple forms of digital assets, transferrable and non-transferrable. For example, the “Digital Reputation” of an Amazon vendor drives volume to its digital store. This form of Digital Asset is not transferable but generates volumes and sales. A crypto wallet containing Bitcoin, Ethereum, Kraken, or other sorts of cryptocurrencies is a digital asset convertible into physical assets like fiat currency.

Cryptocurrencies are a Digital Asset class designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in the form of the computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form and generally is not issued by a central authority.

A real threat to the Banking system

The grant of this Banking License by the Wyoming Division of Banking will enable Kraken customers to deposit their income, savings generated from the conventional economy, as well as from the cryptocurrency economy. Kraken will be held to the same regulatory standard as a conventional chartered bank. During the Cryptocurrency bubble of late 2017, banks like JP Morgan had warned against the high volatility and lack of underlying assets that cryptocurrencies were. After the bubble burst, that same bank announced the JP Morgan Coin release for digital payments. Goldman Sachs is also considering the creation of a cryptocurrency. For banking giants to investigate that space, it signals a potential growth pathway. History will tell who is best equipped to be successful in that race toward cryptocurrency.

Interestingly, the opportunity space is set in motion by moves of financial institutions investing in the digital asset space.

Opportunity Space

The world’s economy and exchanges are becoming more digital every day. Thanks to platforms like Amazon, Alibaba, Rakuten, Google, Apple, and Facebook, creating secured means of transaction and digital wallet is primordial. These digital wallets will be fuelled by either fiat or cryptocurrencies. They will become the materialization of both Physical and Digital Assets and power the economy through hybrid forms of transactions.

Technology and security will be significant enablers of changing buying behaviors. Security will reinforce Trust. “If Money is the currency for exchange, Trust is the currency for interaction,” as pointed out by Rachel Botsman, a world-renowned expert and academic in the field of “Trust.” Blockchain will provide security and a hybrid between fiat and stable cryptocurrency boost transaction.

Why should traditional banks and insurers worry about this?

Insurers and Banks exist to give financial access and intrinsic value protection to various asset classes, mostly physical like properties, vehicles, Etc. Their value chain is directed to remediate damages that occurred on physical assets. Traditional General Insurers operate an extensive network of builders, repairers, and assessors whose job is to remediate damages to physical assets. Banks and Insurers Technology stack supports this model and the distribution of their product suite. General insurers are in the business of remediation.

If we assume that banks and insurance customers will value Digital Assets over Physical Assets, the entire value chain is not fit for purpose and needs a rethink. This change is not something that will occur overnight. We can detect strong signals that suggest that the Financial Services Industry will shift toward the digital space.

Some of those signals are; the drop of car ownership in emerging customer segments like millennials and a lockout from the property ownership market for a large portion of the Western population under 40.

Banks and General Insurers will have the option of moving into financing and insuring Digital Assets, thereby creating protection mechanisms for valued asset classes, regardless of their physical or digital form.

What could the future hold in terms of growth pathways for digital assets?

The world is transitioning at a fast pace and embracing automation. Remote working is becoming the norm in many countries in the services industry. It is informative to discuss exciting emerging concepts as the world is gradually embracing digital assets. What would be a Digital Asset for a worker in a world where AI can enhance/replicate its knowledge? Will it be possible one day to fully replicate a worker’s intelligence, thinking process, experiences? If yes, will this sort of technology be accessible for workers? Will it be possible to license our intelligence, knowledge, and expertise to a bot? If yes, this bot will be enabled to work 24/7 in interaction with other bots. This “Digital Twin” will create income for its physical owner and become its most precious asset. Like any other valued asset class, this “Digital Twin” will need protection in the form of insurance. This Insurance may be against the virus or loss of income due to performance/downtime.

What we see emerging with cryptocurrencies going mainstream is just the tip of an iceberg. The Digital Asset revolution will change the world in ways we could never imagine.