Even before the advent of cryptocurrencies and blockchain, banks have been widely criticized for failing to innovate quickly enough, whether due to legacy back-end technology or policies such as overdraft fees that infuriated customers.
Now, the banking industry wants to get in on the action, especially with a friendlier regulatory backdrop under the Trump administration, which wants to make the U.S. the crypto capital of the world.
Recently, a group of banks and state banking associations launched the BankChain Alliance, which aims to build and operate its own blockchain network.
What is the BankChain Alliance?
According to the BankChain Alliance's website, the cohort includes 39 state banking associations comprised of 3,283 banks with a collective $21.8 trillion in assets. Kathy Kraninger, president and chief executive officer of the Florida Bankers Association, is the president and CEO of the organization.
Image source: Getty Images.
The goal is to create an interoperable blockchain that all alliance members can use for a wide range of activities, including smart payments, tokenized deposits, stablecoins, automated settlement, and other innovations.
Kraninger said in a statement:
This is about banks of all sizes building their own future. Through an unprecedented collaboration representing thousands of banks, BankChain Alliance is developing a secure, regulated, industry-built, and industry-owned network that allows institutions of all sizes to provide modern capabilities so they can continue serving customers safely and efficiently in rural, urban, and regional communities across the country.
The BankChain Alliance is still searching for a technology partner to help it build the blockchain, but it is targeting a 2027 launch.
Why now?
The blockchain and cryptocurrencies were created as a direct alternative to the traditional banking system, after the disastrous Great Recession in 2008 that put banks in the limelight -- and not in a good way. So, in some ways, crypto has always been a competitor to the banking system.
Stablecoins, digital assets pegged to a currency or commodity such as the U.S. dollar or gold, have also become a potential problem, offering a fast, theoretically inexpensive way to transfer money to someone with internet access. Some companies also began offering yields on stablecoins, posing a threat to bank deposits.
Banks have been more cautious in moving into crypto because they are heavily regulated entities. However, new legislation makes it much easier. President Donald Trump has already signed the Genius Act into law, which creates a regulatory framework for stablecoins.
Notably, the legislation requires stablecoins to be 100% backed by liquid assets and requires stablecoin issuers to comply with the Bank Secrecy Act, the main U.S. anti-money laundering law, among many other provisions.
Another major piece of legislation, the Clarity Act, is still pending and would establish a regulatory framework for cryptocurrencies. The bill includes language stating that idle stablecoins can't earn yield, but stablecoin transactions can earn rewards, similar to credit card transactions.
Even with the ban on earning yield on idle stablecoins, bank lobbyists are still concerned about the threat posed by stablecoins, specifically because they might compete for bank deposits. So it's definitely a good idea for banks to embrace new technology.
Most banks have to answer to three regulators and abide by numerous anti-money laundering and cybersecurity laws, which could give them a leg up in complying with new stablecoin regulations and in attracting large enterprises that want to use some form of blockchain technology.
Now, the real promise of stablecoins is the potential to conduct transactions for free or at a much lower cost than with current payment technology.
It may be difficult for banks to do this, but it becomes more feasible if they can leverage blockchain technology to attract customers who bring lower-cost deposits or do other business with the bank that generates meaningful revenue.
The big question is, can banks attract customers away from fintech and blockchain companies that are often better at customer acquisition? Much remains to be seen, but banks certainly need to embrace technology more quickly than in the past, so the BankChain Alliance is a promising first step.
