Clarified crypto rules are about to usher in a new banking paradigm

Last week was a watershed in the evolution of the U.S. digital asset ecosystem, with two high-level official statements on next steps for the regulation and development of its market structure. Lifting the lid and peering more closely, however, reveals that it was more than that. Going beyond just digital assets, last week marked an inflection point in the traditional banking business model.

Last Wednesday, the President’s Working Group on Digital Asset Markets, or PWG, finally published the road map President Trump requested upon its creation back in January. The report adds 166 pages of detail to the administration’s promise to recover U.S. leadership in financial innovation by creating clear and supportive rules for the adoption of blockchain technology.

The more than 100 proposals include a clarification as to what extent banks can participate in crypto asset activity; modernizing the payments infrastructure to support stablecoins; setting new capital rules for crypto assets held on bank balance sheets; increasing transparency around master account and bank charter applications; updating anti-money-laundering rules for decentralized services; and a whole lot more.

Then, just one day later, Securities and Exchange Commission Chairman Paul Atkins delivered one of the more astonishing speeches in crypto history: He outlined Project Crypto, specifying four policy areas for his staff to focus on in their efforts to create a crypto framework. These include asset issuance, custody, licensing and the use of decentralized applications in financial markets.

Both proposals came laden with detail as to intentions, a refreshing change. But even more surprising was the scope of the ambition. The initiatives are not just about creating new rules for crypto assets: They’re also about an overhaul of U.S. securities and banking regulation. As such, they impact all market participants, traditional and new.

Essentially, the aim of the PWG report and the SEC’s Project Crypto is to blur the boundaries between traditional and blockchain-based markets and financial services.

This may sound terrifying to many, as the structure of global finance is a complex web and any profound change will of course give birth to unforeseen risks. Yet it is also exhilarating for those who know there is greater risk in suppressing technological change, pushing it offshore or into more opaque corners of economic activity. Put differently, the proposals are controversial and will meet strong resistance from certain quarters — but that should, hopefully, strengthen those that do make it through the scrutiny and consensus building.

So, it’s worth looking at how the road maps will impact the U.S. banking sector, starting with the most complex and moving toward easier wins.

The deepest operational impact is likely to come from enabling financial institutions to embrace decentralized applications, with flexible yet automated transactions either for internal processes, such as FX conversion, or as a client service, such as small-scale lending from a P2P pool. Until now, banks and other regulated market participants have shied away from the lack of consensus on what “decentralized” means and who would be responsible should something go wrong. But time and persistence will bring clarity, opening up new avenues to reduce costs while boosting client engagement and loyalty.

Another strong win for banks will be the establishment of clear rules for tokenization, the issuance of tokens linked to traditional assets such as equities, bonds, funds, real estate and commodities. The advantages include potentially lower issuance costs, fast and transparent distribution and more efficient settlement. In his speech, Atkins referred to the Wall Street and tech firms “lined up at our doors with requests to tokenize.” This doesn’t necessarily mean investors are as eager, but greater familiarity with stablecoins will lead to increased awareness of the convenience of assets that live on the same ledger, especially when combined with the reassurance of trusted financial partners.

Plus, tokenized assets facilitate the creation of structured products, enhancing their transparency while reducing lifecycle costs. And demand for private assets could be boosted by the greater transparency and transferability of on-chain representation.

Furthermore, investment bank divisions will be able to assist clients with native on-chain issuance such as equity or debt in the form of tokens, broadening capital raise opportunities as well as the potential client pool.

Banks embracing the radical changes described above will face a heavy lift, no matter how supportive the framework: Financial institutions are not like tech companies, with fast iterations and a “break things” culture. But they will have to increasingly compete against new visions of financial services from nonbanks. To do so, they will need an ability to more freely maneuver with clients and within activities they know well.

Last week’s proposals will give them the scope to do so.

For instance, we could see the familiar bank offering of standard investment services elevated to include a broader range of asset types. Both the PWG report and Project Crypto vowed to rethink financial market licensing, stressing the need to allow securities and non-securities to trade on the same platform. Banks would be able to offer access to tokenized funds, equities and commodities alongside native crypto assets such as BTC on the same interface, improving the client experience.

Also, clients are used to interacting with banks via a web or mobile app linked to a specific account. On-chain, that becomes a wallet, which manages blockchain addresses and which can offer a much wider range of services, all using the same ledger: payments, saving, trading, custody, borrowing, even management of on-chain loyalty points and rewards. What’s more, banks would be able to add features as client interests and compliance rules evolve, expanding the “super-app” concept and further deepening the relationship. On-chain services are a simpler development undertaking than struggling to get archaic technology stacks to work with other archaic technology stacks.

In sum, the crypto frameworks outlined last week by the PWG and the SEC are about much more than supporting the development of the digital asset industry. They’re also about traditional finance and the inevitable blurring of boundaries between the old and the new. It won’t be easy, nor should it be as the stakes are high. But, for the first time in a generation, last week brought us to the threshold of a new market paradigm.