Erin Dangler: It seems like everyone and their dogs are getting into cryptocurrency nowadays. Reports of the high-risk high-reward technology are ever present in the media, piquing the interest of many. And with so many currencies to buy and platforms to get investors started, it's no wonder that people are easily finding their own routes to trading.

Fiaz Sindhu: One aspect of it is just being an interesting, speculative new asset class that's easy to get into. Anybody can go in and open an account on a crypto exchange and buy cryptocurrency. Anyone can do that.

Erin Dangler: But while the road to crypto trading might be simple for the individual, for banks, it's a whole other story. Regulations, compliance, tech upgrades, for banks to really take advantage of the technology and offer crypto to their customers, they have a lot to learn, but maybe not as much as they think.

Fiaz Sindhu: The learning curve is really not that steep and, frankly, I think the entire industry is going to have to learn an entirely new glossary of terms in this space. Having said that, experienced blockchain cryptocurrency people can help shorten the learning curve for banks in this space and supplement their learning process. There's many levers that clients can pull to shorten the learning curve.

Erin Dangler: This is Financial Futures, the podcast that charts the frontiers of fintech innovation. In this series, we'll be discussing the advances that are modernizing regional banking, bringing cutting-edge tech to institutions and customers alike.

Erin Dangler: I'm your host, Erin Dangler, and in today's episode, we'll be exploring how cryptocurrency can be brought to regional banks. We'll look at just what kinds of cryptocurrencies can be brought to banking platforms, how much demand there is among individuals and corporations and ask what banks need to do to roll out their own crypto offerings. To guide us in our journey today, we speak with head of new business strategy for America's banking solutions at FIS, Fiaz Sindhu, all about how this once counterculture technology is coming into the mainstream. And to start us off, Fiaz explains a bit about what the crypto market is looking like right now.

Fiaz Sindhu: In one word, it's volatile. It's a very volatile market right now. Many people have talked about us being in a crypto winter based on a significant devaluation in a number of crypto and digital assets over the last several months, but I think it might be helpful just to talk about what we mean when we say crypto. Cryptocurrency is a form of digital money. Bitcoin falls into that category. Stablecoins fall into that category, but they're just a subset of digital assets. Stablecoins are those that are pegged to real-world assets, collateralized assets, are stable. Bitcoin was created as a form of private money, peer-to-peer value exchange system. It has suffered the last few months from a valuation perspective, but not as bad as some of the other crypto and digital asset instruments we've seen out there.

Fiaz Sindhu: Where we've really seen the major devaluation in the instruments is in what I would characterize as the more speculative crypto and digital assets. Whenever interest rates go up, assets that may be inflated in value start to suffer. We're seeing that across the board, and we're seeing the Federal Reserve start to take some more active actions to combat the inflation we're seeing in the broader economy. The crypto world is not immune to that. Some of the people who are getting involved in crypto are speculators, and they're starting to the see their asset valuations and investments suffer, but the broader crypto thesis around the digital money use case, while we've seen a devaluation in the Bitcoin price, we're not really seeing the digital money, programmable money use case, being impacted too broadly by this crypto winter. It's really impacted the more speculative assets out there.

Erin Dangler: Yes. Volatile is definitely a word that probably springs to mind for many people out there, but, despite that, interest in crypto has absolutely exploded in recent years. I mean, you've got Super Bowl ads with Matt Damon and sports stadiums named after crypto exchanges, I mean, which is really remarkable. I just want to go back a little to when crypto first emerged. Who were the people buying into it?

Fiaz Sindhu: I'll talk about Bitcoin because that's the biggest private cryptocurrency from a by-market-cap perspective. Bitcoin was invented in 2009 roughly and, again, 2009 was when the first blockchain was launched. Bitcoin was the use case launched on it and it started, the people who were really getting into it in the early days were mostly tech geeks, people who were interested in the technology, and that's where the adoption of this instrument started to grow. There were maybe some questionable use cases where people started to participate in the crypto ecosystem, in the Bitcoin ecosystem. We saw this with what happened with Silk Road, going down in the earlier part of the decade and what happened there from a criminal perspective, but we've seen the market cap for crypto being a trillion dollars today and Bitcoin being a huge part of that. Those are huge numbers.

Fiaz Sindhu: Back in 2015, the Commodities and Futures Trading Commission, which regulates commodities in the United States, they gave a guidance in the market that said they view Bitcoin as a commodity. So they gave a declaration in terms of how this asset should be viewed, treated from an accounting perspective. And when we saw that happen in 2015, we started to see institutional investors start to dip their toes a little bit in Bitcoin. I'm talking about asset managers, hedge funds, corporates, starting to hold Bitcoin on their balance sheet. But we started to see that institutional adoption. We also started to see some of what I would characterize as the emerging super app ecosystems start to offer Bitcoin on their platform. So in 2018 CashApp introduced Bitcoin buy, sell, hold in their ecosystem. And the growth of CashApp's user base started to grow pretty materially after they introduced that capability.

Erin Dangler: So fast forwarding to today, who would you say are the main players in crypto now?

Fiaz Sindhu:If we look at who's actually participating in this market, there's really two sides of the participants, right? There's the institutional side, which is asset managers, hedge funds, et cetera, that are starting to get exposure to this asset class, mostly Bitcoins in particular. And then the other side of the engagement is on what I'll call the retail user side of the house. It's cross generational. There's this perception, I think, it's oh, it's Gen Z or millennials. And it is. The crypto adoption on the retail side does tend to skew towards younger demographics, but it's not bounded to those younger demographics. It's Gen Zs, it's millennials, it's Gen X or it's seniors, in some cases, and their interest is multifaceted, right? Some people it's in a speculative asset class they're interested in getting exposure to. Some people, they're interested in the technology, programmable money and wanting some exposure to that.

Fiaz Sindhu:And in some cases, there's a little bit of libertarian leanings, right? Where people are looking at alternate forms of money, maybe there's some questions or concerns about fiat currency that they're holding today. And we're seeing this on a global scale in some countries where local currency is viewed as perhaps weak, crypto adoption has done well in some of those geographies. El Salvador is a great example where the government of El Salvador declared Bitcoin as a, well, legal tenure. We're seeing some other countries start to look at that. And within the United States, people who have looked at the Federal Reserve and how the Federal Reserve has behaved with interest rates over the last few years, cutting interest rates for a number of years, even before the pandemic, some people start to look at another form of money, that they would have more confidence in. So it's not any one demographic that's driving the growth. It's across the board, it's institutional investors, retail investors. And then on the retail side, it's really across the board from a generational perspective. And there's many motivations that drive that adoption across the retail segment.

Erin Dangler: It really is a broad swath of people using cryptocurrency in one form or another. Can you tell me how much of the market is made up of private citizens compared to financial institutions?

Fiaz Sindhu: Institutional investors are driving the bulk of that market. When Tesla is talking about holding Bitcoin on their balance sheet or Jack Morrisey is talking about holding Bitcoin on the balance sheet, and you're seeing some big corporates like Mass Mutual talking about holding and Micro Strategy holding some exposure to Bitcoin, it's not a few hundred dollars of Bitcoin, it's in the millions of dollars, if not more, that's being held on the balance sheets of some of these companies. So that's what the likely bigger driver is of the market cap and market valuation of Bitcoin specifically. But retail investors are a huge part of the market as well. I don't have a percentage breakout offhand.

Erin Dangler: And why do you think that crypto is such an interesting investment for private citizen investors?

Fiaz Sindhu:Yeah, I think it's a number of factors. I think one aspect of it is just it being an interesting speculative new asset class that's easy to get into. Anybody can go in and open an account on a crypto exchange and buy cryptocurrency. Anyone can do that. It's a very easy process to do. Then there's the tech people who are really interested in the technology itself, the idea of programmable money, peer to peer exchange of value. And then there's a group of people who are just looking for exposure to an asset class, right? Having some exposure as part of a diversified investment strategy. There's people, and this is another form of speculator who took a position in cryptocurrency. I think these are from a retail perspective. I think these are the common use cases of why folks have taken interest in this.

Fiaz Sindhu:There's also a social aspect to this. So some of the digital assets out there are a little bit interesting, right? There's NFTs. There are crypto kitties, crypto punks, and meme coins like Dogecoin and the Shiba Inu coins. So I think the interest that drives those assets is a little bit different. It's more of a social interest, I would say that drives the speculation, social interest that drives the interest in those digital assets. But the digital money use case and Bitcoin is the biggest form of digital money in the crypto world from a market cap perspective, it's speculators, people looking for diversified portfolio, adding crypto instruments into the portfolio, technology people that're interested in exposure to the asset class. Those are really the drivers in the retail segment.

Erin Dangler: We can clearly see the appeal for private citizens getting into crypto. And as you've mentioned, there are numerous ways for people to start buying crypto assets. Can banks afford to ignore crypto?

Fiaz Sindhu:They can't afford to ignore it. And I think there's a couple of ways to look at this. One is from the standpoint of the private money use case. And then the other aspect to look at is the actual technology use case for this stuff. So from a private money standpoint, if you look at the adoption of crypto currency, there are large ecosystems out there that have retail banking customers that are holding Bitcoin on behalf of those customers. So for example, it could be a crypto exchange like an FTX or Coinbase. And then you look at ecosystems like I talked about CashApp a little bit and PayPal that'll enable their users to buy Bitcoin and some other cryptocurrencies in the PayPal ecosystem. So in order for people to buy those crypto instruments, they have to transfer fiat currency to that platform to execute that order.

Fiaz Sindhu:And that fiat currency is typically coming out of a bank. The risk there from a banker's perspective, if the bank is not offering an on-ramp for their end customers to participate in those ecosystems, the customer is going to participate in those ecosystems directly themselves. And the risk to the bank is disintermediation of the bank from the client relationship. That's really the threat, but also opportunity for a bank.

Fiaz Sindhu:The other opportunity is more on the technical side. One of the things blockchain technology can solve for is rapid transfer of value across multiple intermediaries with faster settlement times of transactions across those intermediaries. And we've seen some banks in the United States work on what I'll call tokenized dollars. So just another format of a dollar on the blockchain, but there are banks that have built platforms to support that, tokenized dollars on the blockchain, to facilitate faster payments between counterparts. So that's a very real use case for blockchain technology that can help the banking industry better serve their clients. So it presents an opportunity for banks, again, in terms of better servicing their clients, particularly on the commercial side, thus provides a new revenue stream opportunity for banks and financial institutions.

Erin Dangler: Clearly the people want access to cryptocurrency. And at the moment there are plenty of platforms out there giving them the access they're craving. So with the crypto platform market already meeting the demand for these private investors, do customers really want their banks to offer crypto capabilities too? And if so, how can banks find out?

Fiaz Sindhu:One of the foundational things that we often talk to our clients about is, do they understand how their clients are engaging with the crypto ecosystem? So there are many on-ramps for people to be able to acquire cryptocurrency. They can do it through a crypto exchange. They can do it through one of the super app ecosystems that we talked about a little bit earlier, but a foundational question is, do the banks understand how many of their clients are engaging with those ecosystems? And some banks have a better grip on this than others. It's very easy to determine how clients are engaging with these ecosystems. One way is simply to ask them, but a more systemic way to do it is to just look at funds transfer activities from the bank to crypto native companies, how much money per month is moving out of the bank to the crypto native world.

Fiaz Sindhu:And it's very easy to do that analysis for a financial institution. Some banks are monitoring this within their client base and keeping an eye on it. Some banks frankly, have not been doing this because we know that. And some of our conversations with our clients, some banks are more concerned about it than others, but it gives a financial institution a sense of how their clients are engaging with the crypto ecosystem. And thus gives them a view into what the demand is within their client base for these types of instruments. So we always tell financial institutions that if they're not looking at those metrics in terms of funds movement to crypto companies from the bank on a monthly basis, that they should be doing that.

Fiaz Sindhu:And then the traditional product needs analysis that banks do with their customers, asking their clients, particularly their larger clients, about their interest in these assets. That's something that we encourage banks to do just as part of their business-as-usual needs analysis they do with their clients. But a very simple way to look at the demand is just to look at the funds movement from the bank to the crypto companies.

Erin Dangler: And of course, those institutions, as you say, do have the power to find out whether or not customers are engaging in crypto. So I bet there's a huge amount of data already available to them to work out whether or not there's a demand for crypto services within the bank. So knowing whether or not there's a demand for cryptocurrency is one challenge. What are some of the other barriers that banks come up against when they're trying to get into crypto?

Fiaz Sindhu:So in terms of barriers, I think there's two things to look at. One is the technology barrier and the second is the regulatory barrier. And I want to think of them more as small hurdles that banks need to think about. From a technology perspective, banks are servicing cryptocurrencies or digital assets, means the bank is helping support management of the private keys for that cryptocurrency for those end customers. That's one way to think about it. And in order for a bank to be able to do that, there's some technology and operational things that a bank needs to do to be able to support that. The bank needs to think about whether they want to outsource that facility, that function to a qualified cryptocurrency custodian, or a bank could think about providing that service themselves in house. And that would entail acquiring the technology skills and expertise to be able to do that.

Fiaz Sindhu:The other aspect to think about is the regulatory work that would need to be done to be able to bring these instruments to market. So if a bank wants to offer cryptocurrency or digital assets to their end customers, they have to think about it from two perspectives on the compliance front. One is what do they need to do with their end customers in terms of product disclosures, terms, et cetera. And then there's some work that the bank will likely need to do their regulators to educate their regulators on their plan. What are they planning to do? What kind of crypto currency assets are they planning to offer? How they're going to be offering those assets and instruments to their end customers? So those are, I would say are the major barriers and hurdles that banks need to think about for participating in this space. Not insurmountable, but there's some work that's got to be done that's not traditionally part of a bank's operations just based on the newness of these instruments.

Erin Dangler: Well, I'm sure that's reassuring for our listeners. There's work to be done, but it's not impossible. You mentioned earlier about stablecoin. Could you possibly talk us through that in a little more detail?

Fiaz Sindhu: A stablecoin is a digital asset cryptocurrency that is backed by something, something that generally keeps it pegged, the value of that stablecoin for example, one US dollar. So there are multiple ways to create a stablecoin. Some stablecoins are backed by real world assets. These are collateralized stablecoins. So for example, there are stablecoins that are backed by combinations of US treasuries and fiat currency. That's a form of a stablecoin, there's a number of stablecoins that are structured that way. There are stablecoins that are backed by other things like commercial paper fiat currency basket of instruments. So that's another example of a stablecoin again, with the goal of that stablecoin being pegged to one US dollar, but the collateral backing it is something different from fiat currency and treasuries. And then there's stablecoins that are, and I'll call these quote unquote stablecoins that are not necessarily backed by anything in the real world but are backed by other cryptocurrencies.

Erin Dangler: Yeah, I know that Terra LUNA had a major crash recently due to its particular type of stablecoin. Can you talk a little bit about what happened there?

Fiaz Sindhu: So in the case of Terra LUNA, in the Terra LUNA ecosystem, they had a stablecoin in the ecosystem. There are multiple stablecoins, but stablecoin that was the major one was the UST stablecoin. And that stablecoin is pegged to the value of $1, but what's backing that stablecoin, what was backing it was LUNA, which is the native token in the Terra LUNA ecosystem. So you had a stablecoin cryptocurrency, UST, backed by another cryptocurrency within that same ecosystem, which was the LUNA token. So what happened in the case of Terra LUNA was at a high level, it was a bank run on UST. So within the Terra LUNA ecosystem, one was able to exchange one UST for the equivalent of $1 of LUNA, if someone wanted to do a redemption of that UST and then if they wanted to sell that LUNA, they could go do that in the open market.

Fiaz Sindhu: So based on the volatility in the crypto markets over the last few months, what happened with LUNA is that the price of UST started to lose its peg against the US dollar. And then there was a run on UST where UST holders were redeeming their UST holdings for LUNA en masse, which caused a very rapid inflation in the number of LUNA tokens that were out there. So it was basically like the Terra LUNA ecosystem was printing lots of LUNA, orders of magnitude greater than what existed, in order to meet the redemptions that were coming out from the UST holders, who were redeeming their UST for LUNA. The result of that was a collapse in the price of both UST and LUNA, which resulted in the loss, the paper losses that were in the many billions of dollars. So.

Erin Dangler: Should what happen to Terra LUNA be a red flag for traditional financial institutions?

Fiaz Sindhu: It's something that should be a red flag for institutions in the sense of when they look at stablecoin participation and offering those instruments to their end customers, ensuring that those instruments are actually backed by real collateral is important. The stablecoins that are getting a lot of interest these days from Washington, the regulators are actually doing quite a lot of work on this, the Congress is looking at a lot of things in this space in terms of rules and regulations that it would want to trade around stablecoins. But ultimately what they're looking to solve for, I think, is ensuring that if stablecoins are offered, that they are offered under the auspices of regulatory oversight, and then the risk of a bank run on a stablecoin is greatly reduced, right? Because what happened with Terra LUNA, if that happened in the real world, where there were many people holding the token and using it in a real world context, you're talking about almost an apocalyptic event from a financial services perspective.

Fiaz Sindhu: So ensuring that stablecoins are regulated, backed by stable collateral, real collateral like treasuries or US dollars, I think that's something that is being discussed very actively in Washington. I think that those stablecoins that are that meet that criteria could do a lot of things from a financial services perspective. And one of the use cases that's very interesting to bankers and crypto technology people is payments. The ability to transfer value using stablecoins on the blockchain, both domestically, internationally in a cross-border context is very compelling and could really reduce a lot of friction in the payments ecosystem in the world. So that's why stablecoins are very interesting to people in the technology community who are active in crypto and also presents a very interesting opportunity to financial institutions.

Erin Dangler: Collateral backed. Okay. I'll have to remember that if I ever look into stablecoin. So what else should banks be thinking about when they get into cryptocurrency?

Fiaz Sindhu:I think a couple things to think about from banker's perspective. One is determine what you really want to be in this space as a bank. Cryptocurrency, as we've talked about, it means a lot of different things to a lot of different people. I've talked a little bit about the digital money use case. Does the bank want to offer spot crypto instruments like Bitcoin to their clients directly? Do they want to leverage crypto technology in the context of streamlining business to business payments? Does the bank want to be in the business of servicing and banking crypto native companies? So those are all different things, but a bank has to decide what crypto use cases they want to support. What's going to best support the needs of their client base and the growth of their business.

Fiaz Sindhu:Another thing think about is understanding what are the needs of the clients of the bank and what are the needs of the markets the bank is participating in. So this really is about looking at what the banks and customers are doing. How are they engaging with the crypto ecosystem? What are the needs that they're expressing to their banker, right. The other thing is the markets, right? What are the competitors of the bank doing? These are parties that a bank needs to understand in terms of how they're engaging with their end customers. So knowing the client, knowing the markets, I think is very important. And I think the last thing that comes to mind is really understanding the blind spots within the bank, right? There's a lot happening in this space. This technology's moving very, very quickly. So from a banker's perspective, they've got to think about some compliance and regulatory talent in house to support the bank's strategy, right? And most banks don't have those types of skills in house today.

Fiaz Sindhu:And then there's the execution aspect of this. So if you choose to offer crypto based instruments to your end customers, there's definitely a technology element to that. This requires some execution skills within the bank, even if the bank is outsourcing some of this to a third party to support, having the know-how understanding of the ecosystem is important. So there's some upskilling that's going to need to happen across the board within the banking industry. So I think those are a couple of blinds spots, I think are important for banks to address as they think about crafting a strategy.

Erin Dangler: As Fiaz has mentioned, and as with any new tech rollout, adopting cryptocurrency isn't without its hurdles, but with a bit of learning and taking a little bit of time to understand these digital assets and the customers using them, those hurdles suddenly don't seem so bad and certainly nothing that a regional bank couldn't handle. So what kind of benefits or opportunities could regional [00:26:00] banks experience if they decided that crypto was indeed for them?

Fiaz Sindhu:I think there's a huge opportunity for financial institutions to monetize client's engagement with crypto ecosystems, right? And offering cryptocurrency custody to end customers with the ability to transact, transfer and send that crypto to third parties, acquire crypto. That is an opportunity for banks to generate some new transactional revenue. If banks are looking at, and there are banks that are doing this today, that are servicing or banking crypto native companies, that represents a whole new commercial line of business for banks servicing an entirely new industry, there I'd expect more banks will be looking to do this in the future, but this is just a new type of market for banks to serve, engaging with crypto natives and banking those crypto natives, another revenue opportunity revenue stream for financial institutions.

Fiaz Sindhu:I touched on the payments use case earlier, whether we're looking at stablecoin payments or transfer of tokenized US dollars on the blockchain. This presents an opportunity for banks in the space of business to business payments, which is another revenue stream for banks historically. And this is just scratching the service. We could look at providing trust services to clients who have banks that have trust operations, local trust operations if they want to do custody of N number of digital assets for a client, that's another revenue opportunity for financial institutions. So there's a lot of ways to think about how banks can monetize cryptocurrency engagement with their end customers.

Erin Dangler: It sounds like there's plenty of opportunity out there for banks and not just in terms of their private customers, but the businesses they serve too. You mentioned earlier about some of the complexities around setting up crypto services. How can banks partner with experts to get launched on this journey? I mean, where can banks find support when they take that plunge into crypto?

Fiaz Sindhu:Education is really important in this space, right? I think that there are plenty of really smart people that work at banks, both in the line of business and in the technology world and the expertise that lives in the banks today is both, it's fintech, it's financial services technology, and blockchain and crypto are not theoretical physics, neither from a technology nor business perspective, in my opinion. The learning curve, it seems daunting to many people, but the learning curve is really not that steep. And frankly, I think the entire industry is going to have to learn an entirely new glossary of terms in this space.

Fiaz Sindhu:Having said that, experienced blockchain cryptocurrency people can help shorten the learning curve for banks in this space and supplement their learning process. Banks can certainly lean on their trusted advisors, their technology partners, and of course outside consultants. As a trusted technology advisor to my customers and FIS customers, I can tell you that I have these kinds of cryptocurrency strategy and education discussions with my clients almost weekly. We talk often about this topic and clients are working to get themselves educated on the space, but there's many levers that clients can pull to shorten the learning curve. But this is something that banks, I think, ultimately are going to have to internalize and make part of their institutional knowledge of their individual businesses.

Erin Dangler: Fiaz Sindhu is head of new business strategy for America's banking solutions at FIS. That's it for today's show. Thanks for joining us. We'll see you next time when we'll be finding out how open banking is transforming the way customers interact with their financial institutions and how the technology is helping regional banks to remain top of mind and top of wallet.