How crypto can change SMB banking, now

Mauricio Magaldi Global Strategy Director, Crypto

16th May 2023 • 3min read

Looking to crypto and seeing it simply as a speculative asset class is a common mistake for financial institutions and even regulators. But if you start to look beyond the headlines, you can see there’s untapped potential for banks to better serve the SMB market.

Blockchains - the underlying tech supporting crypto, have unlocked a unique business paradigm that presents businesses with new avenues for growth. We’ve already seen various industries collaborating with each other and regulatory bodies to identify what the unique applications are in their space.

Coffee:

• From traceability of produce to loyalty programs, the coffee industry is applying new ways to capture value, for both farmers, retailers and consumers.

Entertainment:

• Ticketmaster has given artists the ability to offer token-gated ticket sales through NFTs to ensure loyal fans aren’t trumped by bots.

• Visa and Mastercard are leveraging crypto infrastructure to offer new ways for artists to create and promote their work, manage identity, and reward card use.

Financial services:

• Revolut offers a ‘Learn & Earn’ program to help people get familiar with crypto before investing.

• Nubank has launched its own token - Nucoin, which will serve as part of its loyalty program.

• BTG Pactual launched its own regulated crypto exchange, Mynt, and $BTGDOL - the world’s first dollar-backed stablecoin from a bank.

• UBS issued $50m in blockchain-based debt securities for HNWI in Asia.

The path to adoption is clearer when innovators, customers, and regulators collaborate.

What does this mean for SMB banking?

The focus of tokenization projects is to streamline processes and reduce costs, while creating potential new sources of revenue. Ticks a lot of boxes for SMB clients, right? That’s why there’s so much buzz around it at the moment in the banking space.

Depending on the bank’s strategy, there’s a number of use cases that can tokenized products can lend themselves to:

• Supply chain financing: leverage the final buyer’s credit risk and extend better rates down into the supply chain, automating collections and payouts by tokenizing invoices.

• Debt issuance: raising funds for SMB companies in private markets instead of carrying the asset on the bank’s balance sheet by tokenizing debt.

• Syndicated lending: leveraging the architecture of decentralized finance to facilitate risk sharing when coordinating various lenders via liquidity pools.

• Payments: tokenized deposits can be streamed as long as a business condition is satisfied, much like music or data.

• Collateral management: when using tokenized assets as collateral, if they generate yield or payouts, those can be used to automate the installment payback for the corresponding loan.

Blending the features and infrastructure of both web3 and TradFi, these use cases showcase the ‘DeFi mullet’ thinking perfectly - fintech in the front, DeFi in the back. Each approach demonstrates the efficiencies offered by Blockchains to make a very real, direct impact on your customer base.

The path to adoption is clearer when innovators, customers, and regulators collaborate. By bringing together diverse perspectives it’s easier, faster, and cheaper to define a regulatory framework that can balance both innovation and control, and that can help avoid regulatory arbitrage between different jurisdictions.

In a moment when regulators are still struggling to understand the implications of web3 in their economy, it’s incumbent upon banks to help drive that understanding and collaboration.

Taking the first steps

We know change is scary, but here’s a framework we use at 11:FS, so you don’t have to fear:

• Start from the top with the company strategy. There’s no point in having a “blockchain strategy” or a “crypto strategy”, unless you are a blockchain or crypto company. If you’re a bank, I expect you to have a bank’s strategy;

• Identify which spaces in your strategy can be augmented, propelled, or created with the use of the new web3 primitives or business models - these are your hypotheses;

• Prioritize the hypotheses based on how close to your business and capabilities they are - these are your opportunities;

• For each of them, research within your target audience and design based on their feedback - these are your propositions;

• Validate the prototype, build, launch, and iterate - these are your products.

And you don’t have to do it on your own.

Partner for speed, and build the moat.