Cryptocurrencies like Bitcoin and Ethereum are one example of a digital currency hosted on the blockchain. These tokens’ values are based on supply and demand and their utility. However, they’re not the only option for a blockchain-based currency.

Stablecoins are a type of cryptocurrency whose value is pegged to a fiat asset, like USD. This has the benefit of eliminating the potential volatility of crypto while providing the benefits of an on-chain digital currency (transaction speed and cost, immutability, etc.).

In the early days of Web3, crypto was often derided as a scam or a tool used solely by criminals. TradFi had various reasons why it wasn’t interested in crypto, including:

• Volatility: Cryptocurrencies are known for having high volatility since their prices are defined solely by the market. This creates the potential for massive gains and losses, making cryptocurrencies seem more like a gamble than a safe store of value.

  
  

• Immature Technology: Blockchain is a promising technology, but it’s still in its relative infancy, especially when compared to many TradFi systems. Tools and systems have matured significantly in recent years, and ongoing development means that top Web3 use cases and platforms may not have even been developed yet.

  
  

• Regulatory Compliance: TradFi commonly operates under strict regulatory constraints, and the law has been slow to catch up to technological evolution in the Web3 space. Without regulatory clarity, TradFi institutions wouldn’t — or couldn’t — invest in crypto.

  
  

• KYC/AML: Beyond general compliance, TradFi institutions needed to overcome the challenge of implementing effective Know Your Customer/Anti-Money Laundering (KYC/AML) controls for compliance. One of the main selling points of crypto is the pseudonymity that it provides, which is something that regulators would not look kindly on.

  
  

• Security: The Web3 space — and the DeFi space in particular — is known for major security incidents, with hacks incurring losses of over $1M occurring on a regular basis. The complexity of implementing secure self-custody and the potential risks of security incidents were a major deterrent.

Crypto in its early days had little to appeal to TradFi institutions, especially given the anti-establishment mentality of early adopters. However, the growing maturity in the space — and the rising value of Bitcoin — made dealing in crypto more appealing over time.

Stablecoins are another factor that encouraged institutional adoption of crypto. Some of the benefits that it provides include:

• Price Stability: The price of stablecoins is pegged to a fiat currency and rarely deviates much from that peg (though there are exceptions). Since TradFi institutions are accustomed to dealing with inflation and other risks of these currencies, stablecoins seem safer and less volatile than other digital currencies.

  
  

• Easier On/Off Ramps: With cryptocurrencies like Bitcoin and Ethereum, converting from/to fiat requires finding a trading partner at a particular price point. With stablecoins, the target price is widely known, making it easier to transition between fiat and digital currencies.

  
  

• Governmental Adoption: The lower risk and volatility associated with stablecoins often make governments look on them more favorably. Additionally, some governments have pursued their own stablecoins and encouraged their adoption.

  
  

• Regulatory Compliance: Stablecoins are sometimes treated differently than other cryptocurrencies for compliance purposes. This makes it easier for institutions to adopt crypto in a legal way.

Institutional adoption of crypto is growing, and stablecoins are a common entry point for TradFi organizations. However, the space does face significant risks and threats that organizations should guard against. 

Some best practices for securely adopting stablecoins and other digital assets include the following:

• Secure Blockchain Wallets: Compromised private keys are one of the most common causes of crypto hacks, especially for large financial institutions with significant reserves. Implementing wallet security best practices, such as the use of cold storage, hardware wallets, and multi-sig or MPC wallets, reduces the potential for a compromised account.

  
  

• Comprehensive Code Audits: Stablecoins and other on-chain assets require a significant amount of code to implement, both on-chain and off-chain. Institutions should perform comprehensive audits of their entire codebase, including smart contracts, TradFi systems, and connections between them.

  
  

• Secure Processes and Infrastructure: Cybercriminals are increasingly turning to off-chain attacks to access and steal crypto assets. Ensuring that backend infrastructure is secured in accordance with best practices — such as defense in depth and least privilege access controls — reduces the threat of these attacks.

  
  

• Security Education: Many cyber threat actors operating in the Web3 space use social engineering tactics, such as phishing, to steal private keys or deploy malware. Training employees to recognize these tactics and respond appropriately reduces risk exposure.

  
  

• Regulatory Visibility: The regulatory space is evolving rapidly in the Web3 space as various jurisdictions attempt to keep pace with the technology. Maintaining visibility into current and future legislation can help ensure the compliance of an organization’s security architecture and Web3 projects.

Cryptocurrencies and the Web3 space in general have numerous potential benefits for TradFi organizations. The potential for high-speed, low-cost cross-border settlement alone is enough of a use case to warrant significant investigation. The additional capabilities that smart contracts offer provide the ability to modernize and expand the products and services that a financial institution can offer to its customers.

For organizations looking to pursue projects in the Web3 space, implementing secure and compliant solutions and systems is essential to success. Halborn offers consulting services to support organizations throughout the entire lifecycle of a Web3 project, from initial ideation through deployment on-chain and ongoing maintenance. To learn more about how Halborn can support your move into the Web3 space, get in touch.