NYDIG has recently announced that bitcoin will be coming to hundreds of US banks later this year. It’s potentially surprising news, given that anything bitcoin-related remains untouchable in many parts of the world. But the US banking environment has been making giant strides in its acceptance of bitcoin, and it seems the time is right for the full-fledged emergence of bitcoin banking.
NYDIG: pushing the envelope of bitcoin adoption
Before we dive into the recent news that American banks will soon offer bitcoin-related services, let’s first introduce the company making that possible. New York Digital Investment Group (NYDIG) is a subsidiary of Stone Ridge Holdings Group, and was founded in 2012 by Ross Stevens (ex-Goldman Sachs).
Stone Ridge is an alternative asset manager ($10 billion AUM), so their early interest in bitcoin (circa 2015) is no surprise. NYDIG’s emergence came after Stevens and his partners began acquiring bitcoin and ran into a problem. The professional services they needed for buying and holding bitcoin with regulatory and auditing standards weren’t available. NYDIG was created to service this market, and has a mission to make bitcoin investment accessible to as many institutions and people as possible.
NYDIG was founded near the top of the last bitcoin cycle, meaning that its early years were marked by the so-called “crypto winter” – when many investors lost their conviction. NYDIG’s executives held a firm belief that the institutional and broader markets would become interested in bitcoin again, and used the era of lukewarm enthusiasm to build their services with proper care. This belief became a reality by late 2020, and NYDIG saw the opportunity to penetrate the conservative industry of banking services, via a partnership with FIS.
NYDIG + FIS = bitcoin at your local bank
NYDIG will bring bitcoin to hundreds of US banks through a partnership with Fidelity National Information Services (FIS). FIS is the world’s largest processing and payments company and a technical services vendor to most American banks.
NYDIG and FIS are jointly rolling out a solution to allow any US bank to offer services including buying, selling, and holding bitcoin straight from customers’ existing accounts. FIS will incorporate the NYDIG-powered bitcoin services into the FIS Digital One™ Mobile solution, which US banks are already familiar with. Successful testing has already been carried out over the past six months with Quontic, a New York-based digital bank.
So far, hundreds of banks have expressed interest in implementing the services.. They are encouraged by the fact that there is no need to change their IT systems, as, like other fintech services, the solution will be API-based. This means the banks will never hold bitcoin on their balance sheet and won’t face security headaches.
Simply put, NYDIG will handle the bitcoin part (custodial and trading platform), FIS will handle the technical part (in-app seamless connection to bitcoin custodial and services), and allthat is left for banks is to decide whether they want to expand their services and collect the extra revenue.
Bitcoin and banks: the unlikely allies in the low interest rate environment
The main question is if US banks will choose to expand their service portfolio. NYDIG’s research shows that the customer demand is there and banks are unlikely to have a choice if they want to stay competitive. Per the recent survey conducted by NYDIG, 46 million Americans currently hold bitcoin and 80% of them would prefer to hold it with their banking partner if a secure bitcoin custodial service was available. Moreover, 71% of surveyed bitcoin holders would consider changing banks if a competing bank offered bitcoin-related products. Over 80% of respondents would also like to earn bitcoin-denominated interest.
“Banks can play a pivotal role in the transformation happening in the financial industry. More so than just helping consumers to feel safe investing and storing their Bitcoin.. Until now, acquiring bitcoin has only been possible via investing or mining. The power of bitcoin + Banking makes it accessible in new ways, like interest payments and rewards programs. We believe that a strong financial system is one based on equity and that forward-thinking banks can deliver just that.“-NYDIG, Survey: Bitcoin + Banking
Besides growing demand from customers, there are two major reasons why banks will feel pressured to start offering bitcoin-related services.
The first is that there has been a strong quasi-banking industry growing over the past several years without any involvement from the incumbent banks. These quasi-banking institutions are the crypto exchanges like Coinbase (which recently underwent a major IPO). The banking sector has been forced to watch as their customers’ dollars have exited accounts in favor of the exchanges. And, as the exchanges have begun to broaden their services and get more compliant, the differences between regular banks and these quasi-banks is narrowing. Now, this doesn’t mean the exchanges have won the race. We can see in the above-cited survey that people would prefer to trust their long-time banking partner over an exchange that has only been around for a few years.
The second reason is that bitcoin-related services offer a nice opportunity to earn non-interest income. In the current low-interest environment, these are extremely valuable opportunities to banks. Bitcoin services have the potential to generate significant revenue in a rapidly expanding market. Combine these factors with the low risk offered to banks by the professional services provision of NYDIG and FIS, and there remains little room for hesitation.
“Consumers win by gaining the ability to custody Bitcoin through their trusted financial partner, and the financial institution is able to earn meaningful non-interest income.“-NYDIG, press release
The path forward
In a recent interview, NYDIG’s founder Ross Stevens stated that the first bitcoin-related services would likely become available to US customers by Q4/2021. Customers will initially be able to buy, sell and hold bitcoin via their regular banking account (or to be more precise: a bitcoin IOU, as the private keys will be held by NYDIG; so far it’s unclear whether customers will have the option to withdraw bitcoin to their own wallet). After rolling out this initial product, NYDIG plans to introduce the opportunity for debit card rewards to be paid in bitcoin, followed by a bank account that pays interest in bitcoin.
Silvergate bank was the first in the US to embrace the bitcoin opportunity, – a story we covered in a previous blog post.. Silvergate essentially de-risked bitcoin for the other banks and demonstrated to the industry that banks can work with bitcoin in a compliant and risk-minimized manner. Now, it could even be argued that not offering bitcoin-related services will soon be the risky position. As NYDIG’s Patrick Sells recently stated, this could be the case when looking at the problem from an AML perspective:
“By not offering cryptocurrency trading services, banks potentially have greater AML exposure because they don’t know where the funds that are coming in are coming from.”-Patrick Sells, Head of Bank Solutions, NYDIG