Payment Service Directive (PSD2) - also known as open banking - was an ambitious project designed to move the European financial market into the 21st century.
Its main goal? To allow young and progressive companies to tap into the decades of market data accumulated by the banks and leverage it for the benefit of all Europeans. What the EU could not predict, however, was the boom of cryptocurrencies, which produced a new set of data necessary to achieve that goal. If the vision of the cutting-edge financial system is to come true, the current open banking feeds need a mirror image on the crypto side in the form of an open crypto banking.
It all started in 2013 when an amended version of the EU’s PSD was proposed. It had one clear goal – to help the European financial sector innovate and move into the 21st century. To achieve this, the directive forced banks to make customer data available for analysis and further use by other players in the market. This was to be done via open banking APIs. Moreover, banks also had to allow these third parties to make payments and take other actions in the client’s name.
In other words, PSD2 opened the door for disruptive startups and innovators to build apps that gave users full visibility and access to all their finances. So, no matter how many banks, insurance companies, and investment funds were in a customer’s portfolio, they should all be available with one tap and one secure authorization.
And then bitcoin disrupted everything…
It looked good on paper and it might have worked quite well. However, PSD2 did not anticipate a major change that was brewing in the market. Bitcoin—once an almost worthless and even shady cryptocurrency - exploded in value, dragging thousands of altcoins and crypto assets with it, creating a massive new ecosystem with close to no regulations.
According to a Bank of America 2021 report, the crypto market is already worth more than 2 trillion dollars. Also, the number of US crypto owners jumped from 66 million in May 2020 to 221 million in June 2021. Of course, those numbers are predicted to grow rapidly in the coming years. Quoting the Bank of America strategists: “cryptocurrencies have become too large to ignore.”
Yet, this left the PSD2-compliant banks and FinTechs unable to deliver on the former goals of the directive. Blind to cryptocurrency data, their products simply could not offer true reach over all of their customers' financial assets. An increasingly painful problem, especially due to the fact that by the end of 2021, every fourth US adult (27%) owned or planned to buy digital assets.
To make matters worse, new crypto-based assets can pop up at any time and rapidly inflate the size of the market, attracting flocks of new users. The latest demonstration of this potential is the non-fungible token (NFT)— a crypto asset that creates a fixed record of ownership of a unique digital item. In 2021 alone, the NFT market generated $25 billion dollars in value, with the most expensive NFT selling for $70 million dollars.
Open banking doesn’t cut it without open crypto
As open banking falls short of covering this booming crypto industry, new platforms providing high-quality data are necessary to achieve the former goals of full visibility and control of one’s finances.
A big issue, especially since the crypto universe is still a bit of a wild west, where data is chaotic, unstructured, or even incomplete, limiting its value to the overregulated financial industry.
Also, building compliant, future-proof, and reliable financial services is quite difficult without advanced intelligence such as long-term user reputation, risk scores, and verification of both sides of the transactions. Without those insights, banks and FinTechs can hardly guarantee compliance with the tax legislation, Anti-Money Laundering (AML), and counter-terrorism financing (CFT) regulations. Thus, they have no other choice than avoid all the crypto assets of their clients in the PSD2-enabled apps and services.
What will the future look like?
So, how to address the issue of erratic and yet-to-be-standardized crypto data? One answer is to automatically collect information on thousands of cryptocurrencies and tokens, hundreds of millions of crypto addresses, and dozens of crypto exchanges and process it into a high-quality data feed that can augment banking intelligence.
Using the PSD2 terminology, players in the financial market need a mirror image of open banking—namely open crypto banking. With the crypto market being too big to ignore and a rapidly growing number of people owning it, open crypto banking is the type of innovation that offers an answer to the question “how to create future-proof financial tools that the EU and its directive envisioned?”
