The Next Frontier in Crypto Is Bank Connectivity

Banking infrastructure is receding in some of the world’s most fragile economies. Typically, to transfer money from one country to another, regional banks have relied on correspondent relationships, meaning that a larger, internationally-connected financial institution would provide services like cross-border payments, currency exchange, and cash management on its behalf.

However, banks have been pulling back from correspondent relationships in some markets where access to traditional financial infrastructure is constrained. , despite the fact that demand for cross-border payments keeps growing, with analysts estimating that global remittance flows are on track to exceed $1 trillion by 2030.

This is a great opportunity for digital asset infrastructure providers to step in. By partnering with regional banks, they have an opportunity to create or expand the bank’s own digital asset business, but most importantly, they place themselves in a position where they can build settlement networks to connect institutions on different sides of a border.

We are therefore facing an evolution of the relationship between digital asset firms and banks. The former may well grow out of their role as technology providers, and become long-term settlement infrastructure partners supporting the broader banking ecosystem.

We are losing cross-border financial infrastructure

Global banks aren’t interested in correspondent relationships the same way they used to be. There are two reasons for this, which are closely linked. 

The first is that some correspondent relationships come with significant counterparty risk; the second, that setting up the necessary infrastructure is costly. Maintaining correspondent relationships forces these large institutions to make sustained investments in compliance, monitoring, operations and regulatory engagement. None of that comes cheaply, and the underlying money flows may simply not warrant the effort.

Another way to say this is that these institutions are incentivized to focus on the corridors that generate a high volume of cross-border transactions. That, in turn, leads to a certain concentration of resources; new banking infrastructure is brought to places that already have banking infrastructure. 

But the smaller countries, with their smaller regional banks, get left out. And as time goes by, they have fewer options for sending and receiving international payments.

Digital asset infrastructure companies are stepping in 

In this difficult environment, digital asset infrastructure firms can provide a welcome solution. They can support functions like cross-border settlement, liquidity management, FX, and transaction monitoring on a brand new technological layer. 

The main takeaway is that the infrastructure they employ is much more efficient than the one typically used by legacy banks — and much cheaper, since it bypasses each country's central clearing system entirely and settles directly bank-to-bank on a peer-to-peer basis. Blockchain infrastructure opens up a channel; once that channel is built, operational complexity drops, and that's what drives the efficiency gains. These underserved corridors are then easier to manage.

In fact, compliance can be directly embedded into the transactions themselves, meaning that digital asset infrastructure offers a path towards automatizing new parts of the compliance process. It doesn’t make counterparty risk disappear, but it provides better tools for ensuring AML and sanctions rules are respected.

We could therefore end up seeing the relationship between blockchain firms and banks evolve. Instead of simply providing the technology for banks to deploy their own digital asset products, blockchain firms could build settlement networks across regions.

Put differently, the banks that take advantage of such partnerships would no longer be the end-users of blockchain technology, but would become connectivity points for other institutions.

Connecting the world with the right financial infrastructure

Banks are still experimenting with the integration of digital asset infrastructure. They move cautiously; it will take time for them to roll out this kind of technology.

Nevertheless, this is an important issue that demands to be addressed. Remittances alone represent an enormous and persistent need — after all, they can only occur at scale when banking institutions are connected across regions — and they are by no means the only source of demand for cross-border payments. As international commerce continues to grow, the cost of unreliable institutional connectivity mushrooms as well.

For example, imagine a Filipino worker in Dubai sending money home. Normally, the Dubai bank never actually ships the money, it simply tells a bank it already does business with to cover the payment on its behalf. That request gets passed down a line of banks that all keep accounts with each other, each taking a small cut on the way. At the end, a bank in the Philippines hands the family the money from its own till, and the banks settle up between themselves later.

But with digital asset infrastructure providing a settlement network connecting institutions together, the transfer would move value directly from the bank in Dubai to the bank in the Philippines. The transaction remains traceable between the two institutions throughout the process. The banks are still accountable. It’s just that the settlement path has become direct.

Digital asset firms are faced with the possibility of shifting from being the banking sector’s technology providers to being crucial infrastructure partners for the world’s payments corridors. It’s an opportunity worth exploring.

Editor's note

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