ClearBank, a pioneering financial institution in the fintech space, has recently published a comprehensive guide on the evolving landscape of digital assets and their potential integration into traditional banking systems.
Authored by Andrew Delves, Head of Crypto and Digital Assets at ClearBank, the guide serves as an educational resource on the types of digital assets and outlines how banks and digital asset platforms can collaborate for mutual benefit.
According to ClearBank’s guide, cryptocurrencies like Bitcoin are the most well-known form of digital assets. These digital currencies operate without a central authority and are secured by cryptographic systems. While they offer a level of freedom from governmental control, their high volatility remains a significant concern. For instance, cryptocurrencies can experience daily price fluctuations of 5-10%, compared to major fiat currencies, which typically fluctuate up to 1% per day.
To address the issue of volatility, the guide introduces the concept of stablecoins. These are digital assets designed to maintain a stable value by being pegged to a fiat currency, commodity, or financial instrument.
Stablecoins can be categorized into three types:
- Collateral-backed stablecoins, which are backed by cash or asset reserves.
- Crypto-backed stablecoins, where cryptocurrency reserves function as collateral.
- Algorithmic stablecoins, which rely on algorithms to maintain their value.
The guide also discusses Central Bank Digital Currencies (CBDCs), which are digital forms of money issued by central banks. CBDCs can be either ‘Wholesale,’ intended for interbank transfers, or ‘Retail,’ designed for general public use. The guide notes that CBDCs are still at the proof-of-concept stage, and their overall utility remains a subject of debate.
ClearBank emphasizes the need for collaboration between traditional banks and digital asset platforms. Such partnerships can facilitate the integration of digital assets into the broader financial system. Banks can provide essential infrastructure, such as ‘fiat on and off ramps,’ enabling consumers to easily switch between digital and traditional currencies.