As the US upends an international rules-based order that it created and nurtured, the global financial system is also in flux. Currency manipulation is on the rise as the terms of international trade shift and evolve rapidly. Into this febrile mix of economics and geopolitics, crypto products are moving from the fringe to the mainstream, demanding policy and regulatory responses from the U.S. government. Against this backdrop, firms must weigh policy risks against the chance to lead in a rapidly transforming financial ecosystem.
Long regarded as a fringe movement, decentralised finance (DeFi) is now knocking at Wall Street’s door – and this time, someone is answering. Institutional investors are seeking exposure to cryptocurrency markets, while many financial institutions are exploring ways to leverage blockchain-based innovations in their daily operations. Yet, new technologies are not without risks.
Cryptocurrencies have long been perceived as too speculative and volatile for many retail investors and traditional financial institutions (TradFi) to invest in. But while TradFi waited on the sidelines, DeFi quietly grew. One of the most prevalent examples is stablecoins, cryptocurrencies designed to maintain a stable value, typically pegged to fiat assets like the U.S. dollar, euro, or gold. Long plagued by its association with illegal activities, DeFi leverages stablecoins and other digital currencies to remove the inefficiencies – and centralisation – inherent to regulated markets. After years of uncertainty, American policymakers are intensifying efforts to regulate digital currencies, bringing much-awaited clarity to DeFi. At the same time, major financial institutions, including Visa, PayPal, and JPMorgan, are actively integrating blockchain technologies into their payment and settlement infrastructure. These parallel developments suggest that stablecoins and other digital currencies are shifting from fringe to mainstream. For the traditional financial sector, this convergence presents an opportunity to shape the future of finance – but not without growing pains.
Cryptocurrency and digital asset regulation have become hot topics globally following the highly publicised collapse of the FTX crypto exchange in 2022, partially fuelled by the failure of TerraUSD, an early algorithmic stablecoin. While the EU has instituted a digital asset regulatory framework, Markets in Crypto-Asset Regulation [MiCA] and the U.K. recently released a draft proposal, U.S. progress has lagged. Federal regulators have been criticised for a ‘regulation-by-enforcement’ approach, with the SEC targeting companies operating in legal grey zones. The crypto industry has pushed back, demanding more straightforward operational guidelines. This conflict peaked during recent elections, where a pro-crypto lobby backed Republican candidates promising regulatory clarity. While Trump’s early executive orders and a congressional mandate signalled progress, a comprehensive regulatory regime like MiCA remains distant. Despite concerted industry pressure, U.S. rules are likely to stay in limbo, with the Republican Party incentivised to delay regulation until after the 2027 midterms.
Amid this political manoeuvring, companies must remain aware of regulatory risks and be conscious that winds can suddenly change. The next election cycle could usher in an administration or Congress with different views on digital assets, making it crucial to engage proactively with government agencies and industry stakeholders. Companies should also clearly communicate their risk and compliance efforts to clients and partners. This approach helps build credibility and positions them to benefit from being early movers in an evolving asset class.
Firms must adopt varying approaches to the digital assets debate depending on a company’s target audience. Participation in CBDC pilot programmes may benefit local banks in emerging markets. Still, it may pose challenges for global firms with ties to the U.S. Companies must craft narratives around these technologies that align with their broader commercial goals and consider how digital asset adoption could impact future business prospects, including disintermediation. Ultimately, each firm’s response to digital assets must weigh current regulatory uncertainty against their long-term business strategies.
Any TradFi leader seeking to engage with digital assets must address the lingering doubts and volatility surrounding the crypto landscape. While stablecoins are viewed as less risky than other crypto assets, even those pegged to fiat currencies lack the protections of insured bank deposits. Although pro-crypto regulations will alleviate some concerns, the recent market downturn suggests that the crypto market is not as stable as some proponents would like you to believe. Others may think the recent market crash is a time to focus on tried-and-true growth assets. Companies should carefully evaluate their own and crypto partners’ claims, as poor associations can heighten reputational and financial risks. Smaller fish in the TradFi sea may look for partnerships or coalitions when getting involved in digital assets and should heed the warnings of previous crypto failures.
Still, hesitation does not eliminate the need for clarity. Regardless of uncertainty, firms must decide their stance on digital assets. There’s an opportunity to stay ahead of the curve. By offering timely, informed commentary on regulation, stablecoin adoption, and CBDCs, companies can distinguish themselves as industry leaders, assisting clients and stakeholders in navigating a complex and evolving financial ecosystem. If the traditional finance sector takes advantage of the opportunity that digital assets can be, those businesses must have a corporate strategy that considers the risks posed by the novelty of the space.
