Banks Drawn To Web3 Technology But Restrained By Lack Of Rules

Richard Walker, a new partner at Bain & Co. and co-lead of digital strategies for financial services has plenty of advice for his clients on how to take advantage of the blockchain-powered concepts of Web3 and the metaverse. But a lack of regulation, he says, is slowing adoption from the industry’s biggest players.

“Our clients are largely standing by waiting for clarity,” he says.

Web3, which Walker defines as “a decentralized, democratized environment with a native currency and native digital-rights ownership,” has garnered increasing interest from investors since the peak of the crypto bull run in November 2021. A research report by Bain found that private investments into Web3 technology have surpassed $80 billion, with $48 billion going directly into financial-markets infrastructure.

From wallets to payments, brokers and exchanges, the financial-services industry, Walker says, is perfectly poised for the introduction of blockchain technology. The industry “is really building the foundational rails and assets,” he adds.

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Prior to his appointment in July to Bain, Walker spent 12 years at Deloitte Touche Tohmatsu working in the digital-assets division (though the Bain press release that announced his new role referred to his former employer as “another global business consulting firm”). At Deloitte, he worked on different uses of cryptocurrencies. At Bain, Walker says he’s focusing on “building optionality intro strategies” for financial services to implement Web3 technology.

Walker’s work at Bain largely concerns implementation of metaverse practices and Web3 applications, like nonfungible tokens (NFTs), for banks’ clients and employees.

Big names in the financial sector have already, albeit cautiously, started to adopt so-called Web3 applications beyond cryptocurrencies. J.P. Morgan, a Bain client, has been leading the way, issuing NFTs to attendees of its first crypto economy forum in December.

Walker emphasizes that despite regulatory uncertainty, major financial institutions are still interested in innovations in a decentralized internet. One example is in the implementation of commemorative NFTs. Though no clear regulatory framework has been established for the status of NFTs, the U.S. Securities and Exchange Commission is investigating token creators and cryptocurrency exchanges over potential securities fraud. Under the Howey test used by the SEC, a security is defined as “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” While not all NFTs are securities, the lack of legal definition of those that are makes institutional investors uneasy.

The simplest solution? Make them free. J.P. Morgan used what the crypto world calls an airdrop – a transfer of NFTs into the crypto wallets of attendees. Other financial firms have taken similar approaches. Bank of America
BAC
, the first bank to issue commemorative NFTs, and wealth manager VanEck also have NFT collections that serve as certificates of attendance or membership, avoiding the regulatory cloud that surrounds sales.

This however, hasn’t stopped holders from listing their NFTs on secondary trading sites like OpenSea. After J.P. Morgan issued their collection, one owner listed a token for sale at420ETH (or $1.8 million at the time). According to PolygonScan data, the token was sold for $131.75 in December.

Other banks, like Goldman Sachs and Japanese giant Sumitomo Mitsui, are interested in NFT technology, but have not gone beyond announcing that they are exploring tokenization of assets and implementation of NFTs.

These different approaches boil down to the risk tolerance of different banks, says Walker. “An organization that is at the end of life for a core banking platform, they need to upgrade their tech anyway,” he says. “They may choose to go with a digital bank real-time platform that then allows them to move more quickly into some of the Web3 types of capabilities than a bank that is mid cycle with their platform investment.”

The road may not be direct nor clear for the next 10 years of blockchain technology or its use in financial services. But Walker says he is confident that every small initiative, pilot, test, and implementation is leading to increasing adoption.

“There are clearly going to be interim stages of transformation and adoption,” he says. “Every single week there are little movements which are forming the foundation of the big shifts.”

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