Cryptocurrency is reinventing the exchange of value, much like the internet did for the exchange of information, and the journey will be very much the same. The cryptocurrency movement was created out of the 2008 financial crisis with the belief that the financial system should be better.

In the years since, we’ve seen tremendous innovation and adoption within the global industry. Just look at the growth of stablecoins: cash became the first real-world asset to be tokenised. The year 2022, in particular, was a significant year for the crypto industry. We’ve found that use cases vary all over the world and range from gaming, to art, to music, to raising money for war efforts, as we’ve seen with the global support for the Ukrainian people last year, and relief efforts for victims of the earthquakes in Turkey and Syria earlier this year. With the bear market, we also learned that Bitcoin, the most established and largest cryptocurrency by market cap, is now more correlated to tech stocks than they were in the past. When the broader financial markets slump, crypto does too.

This correlation reflects crypto’s maturity as an asset class: there are a growing number of institutional players involved, new types of financial products are being offered, regulatory oversight is developing, and the market is more efficiently pricing in new information. But there’s one important difference between crypto and traditional finance: transparency. Let’s explore how this has driven a huge demand for new models of ownership in the economy.

In the Chainalysis 2022 Geography of Cryptocurrency Report, Central & Southern Asia and Oceania (CSAO) was found to be the third largest cryptocurrency market, with citizens of CSAO countries receiving USD $932 billion in cryptocurrency value from July 2021 to June 2022. CSAO is also home to seven of the top twenty countries in the 2022 Global Cryptocurrency Adoption Index: Vietnam (1), the Philippines (2), India (4), Pakistan (6), Thailand (8), Nepal (16), and Indonesia (20).

Vietnam and the Philippines, in particular, were found to be massive remittance markets. Cryptocurrency offered a more convenient method for individuals that don’t have access to traditional banking channels and a cheaper alternative to money transfer services. In addition to sending remittances, the data found that users in lower-middle and upper-middle-income countries often rely on cryptocurrency to preserve their savings in times of fiat currency volatility and fulfil other financial needs unique to their economies.

Financial institutions have begun to enter the space, too. Bank of New York Mellon announced its plans to provide custodial services for tokenised securities and crypto assets in Asia. In 2020, one of Singapore’s largest banks, DBS Group, also launched its institutional crypto exchange in Singapore and recently revealed its plans to expand its crypto services to Hong Kong.

Interestingly, DBS Group Holdings reported a surge in Bitcoin trading volume by 80% on its exchange last year even through the bear market and a series of negative events. This aligns with Chainalysis research that found cryptocurrency markets have been surprisingly resilient through declines. Big, long-term cryptocurrency holders have continued to hold through the bear market, and so while their portfolios have lost value, those losses aren’t locked in yet because they haven’t sold — the on-chain data suggests those holders are optimistic the market will bounce back, which keeps market fundamentals relatively healthy.

As interest in cryptocurrency grows, there has been an influx of institutional investment and new cryptocurrency services launched by traditional financial institutions (FIs). However, many FIs remain on the sidelines, perhaps unsure of how to get started or productise offerings around this new asset class.

As more mainstream financial institutions incorporate cryptocurrency into their service offerings for both retail and institutional clients, the key focus should be on seizing the market opportunity while also mitigating regulatory and strategic risk.

The Chainalysis Crypto Maturity Model provides a roadmap for FIs to evaluate market opportunities while, in parallel, addressing regulatory and compliance requirements.

The Crypto Maturity Model: How Traditional Finance Can Adopt Cryptocurrency in Stages

The model defines five stages of cryptocurrency adoption for FIs:

Level 0: Education, strategy and planning

This stage involves designating the key stakeholders for such crypto initiatives across multiple functions, as well as the executive who will be leading the charge. FIs at Level 0 should also start learning about the cryptocurrency exposure they have today – the specific crypto businesses they or their customers have interacted with – and measuring the resultant risk, and consider screening them using an industry intelligence tool like Chainalysis Kryptos. Additionally, FIs should start building their intellectual capital through educational content, social media and engaging the crypto community. Industry leaders regularly publish content that can help financial institutions better understand the opportunities and risks in the crypto ecosystem. Examples from Chainalysis include the Chainalysis Academy with video lessons on crypto basics, blog posts and reports with in-depth research, and live webinars featuring Q&As with industry experts.

Level 1: Open for business

Once Level 0 has been conquered, FIs can begin supporting and interacting with cryptocurrency businesses the same way they would with any other. An important step to take note of here is the development of crypto expertise within FIs. Luckily, this can usually be accomplished through hiring rather than an all-out acquisition. Building out a digital assets team means recruiting seasoned crypto experts across compliance, security, and the roles corresponding to the specific services the firm wants to offer.

Level 2: Synthetic cryptocurrency products

FIs at this stage would have become comfortable working with cryptocurrency businesses and may want to help both retail and institutional customers get exposure to cryptocurrency markets. This does not necessarily mean accepting cryptocurrency deposits or holding crypto on customers’ behalf. Instead, financial institutions can offer synthetic, cryptocurrency-based investment products that allow customers to capture some of cryptocurrency’s upside without the financial institution actually accepting crypto deposits.

Level 3: Enable crypto deposits

In this stage, FIs are giving customers direct access to crypto markets and allowing them to deposit crypto with them – and potentially holding it on their behalf. This is a big task, and FIs can benefit from partnering with crypto-native firms to fulfil virtually all of the necessary functions for accepting and holding crypto deposits.

Level 4: Beyond deposits: Complex products, DeFi, and more

FIs in this stage are rare to see, but not unheard of. There’s a world of opportunities beyond deposits. For instance, DeFi is perhaps the fastest-growing, most exciting area of cryptocurrency, and businesses operating in the space can use Chainalysis Address Screening to automate the customer screening process.

With cryptocurrency becoming increasingly mainstream, banks are no longer viewing it as money for criminals or looking for ways to ban it. Instead, they’re recognising the ways it can help their customers while driving revenue and trying to incorporate it into their larger strategies. While this may seem daunting at first, the Crypto Maturity Model shows that banks can adopt cryptocurrency in a structured, incremental fashion that allows them to test and improve their offerings at each step of the way.

Cryptocurrencies have become a mainstream way to transfer value. Successfully operating a business within the crypto industry requires tools that help your organisation monitor transactions, identify potentially suspicious activity, and address it appropriately. The ability to track and trace funds is no longer a nice to have. Blockchain analysis platforms harness the inherent transparency of blockchains to offer these services to cryptocurrency businesses and financial institutions. Some blockchain analysis firms support government entities — choosing one of these means you’ll have access to many of the same core data sets as the agencies that regulate your platform.

The best solutions help to demystify the world of cryptocurrency and provide visibility into transactions, but the data that blockchain analysis tools provide can vary significantly. This is where Chainalysis plays a central role. By providing cryptocurrency investigation and compliance software, education and expertise to leading institutions in this ecosystem, Chainalysis has become the common link between participants.

Chainalysis provides data, software, services, and research to government agencies, exchanges, financial institutions, and insurance and cybersecurity companies in over 70 countries. Our data platform powers investigation, compliance, and risk management tools that have been used to solve some of the world’s most high-profile cybercriminal cases – including the seizure of funds stolen by North Korean hackers from the Ronin Bridge hack of last year – and grow consumer access to cryptocurrency safely.

Our mission is to build trust in blockchains to promote more financial freedom with less risk.

The Chainalysis Data Platform is at the core of our solutions, enabling us to offer clients different apps and data offerings:

Compliance, investigation, and business strategy experts are using Chainalysis—the standard in blockchain analysis—to bring trust to the future of finance. Organisations consistently choose us because we provide the most extensive and reliable real-world connections to on-chain data. Through robust crypto data collection and analysis, financial institutions, Web3 businesses, and government agencies gain the critical information necessary to make data-driven decisions that lead to positive outcomes such as solving cases faster, highlighting troublesome nation-state activity, and protecting their platforms by effectively managing risk.

The largest community of crypto crime and compliance professionals in the world connect through Chainalysis’ network. Join the global collaboration and information sharing between law enforcement agencies, financial regulators, tax authorities, cyber companies, Web3 businesses, and financial institutions. Visit https://www.chainalysis.com/ to find out more.