Ever since the first currencies of the world were minted, the idea of the banking system began crystallizing and was dominant until cryptocurrencies entered the financial platform. From the early stages until the time capitalism matured, banks have been an indispensable association of fiat money. For centuries now, banks have stood at the pedestal of every economy around the world. But when the familiar concepts of widely acknowledged fiat money are shattered, will the banking system be pushed at the subsidiary level? Questions like this can be answered by analyzing the evolving relations between cryptocurrency and banking.
EVOLUTION OF THE CRYPTOCURRENCY
In 1983, the American cryptographer David Chaum developed a prototype of the now-existent crypto in the form of a cryptographic electronic money called e-cash. This was the first time a currency was able to assume anonymity for a third party. Cryptocurrencies are digital currencies aimed at providing an alternative to fiat money. Much later in 2009, Bitcoin was developed by a pseudonymous developer, Satoshi Nakamoto. In the same year, the first blockchain was launched with the first block, named the genesis block. This was followed by the development of Namecoin, Litecoin and other types of cryptocurrency.
IDEA BEHIND THE CRYPTOCURRENCY: A REJECTION OF THE BANKING SYSTEMS?
Beyond a shadow of doubt, cryptocurrency resolves certain inconveniences that fiat money brings, especially problems related to the transfer of the money and easy crypto investment. Cryptocurrency was created as an alternate method of payment that doesn’t require banks or financial institutions as a third party to verify transactions, thus eliminating the complications. It is backed by encrypted algorithms that function as virtual accounting systems. Its peer-to-peer system enables anyone to send payments anywhere, even to the non-banking population. The cryptocurrency largely owes its popularity to its decentralized finance. Now let us have a look at the developments in cryptocurrency and banks.
LOOKING INTO THE CURRENT TRENDS IN CRYPTOCURRENCIES
Cryptocurrencies have expanded from 50 in 2013 to 21,844 in 2022, with 9,314 active currencies in the market. The total market capitalization of cryptocurrencies stands somewhere around $2.3 trillion. Where initially Bitcoin gained the spotlight, the last 5 years saw an increase in the overall investment and buying of many other types of coins, as well as the development of around 21,000 new types of cryptocurrencies.
Further, the introduction of the Spot Bitcoin ETF further pushed the use of cryptocurrency. It is a form of investment that brings forward the price moves of Bitcoin to ordinary investors. The ETF stands for exchange-traded fund and can be bought and sold like individual stock, but it is a pooled investment security. Ordinary investors, thus, are regulated to invest in Bitcoin through a brokerage account. The investors just need to pay the brokerage and management fees.
So, to put it in a different way, it is an exchange traded fund that tracks the price of Bitcoin. Spot stands for the immediate buying and ownership of the asset. These provide the convenience of buying and selling an asset with the associated value of bitcoin while avoiding the technical complications of maintaining a cryptocurrency wallet. Spot bitcoins create significantly more opportunity for normal investors and thus create a larger marketplace where the sale of bitcoin increases.Given all these developments, the adoption of cryptocurrencies around the world is on the rise, with many businesses and individuals accepting crypto as a form of payment at present. Thus, the future of banking is repeateadly questioned.
IMPACT OF CRYPTOCURRENCIES ON BANKING
Cryptocurrency effects in traditional banks have been quite significant in deciding the future of banking
- The decentralized finance of the cryptocurrency eliminates the interference of the banks. Instead, the whole trust is placed in the blockchains and their distributed nature. Upon being controlled by the banks, the asset will lose its appeal. Thus, it is widely believed that the banks would not be able to enter the space successfully. It is speculated that the authority of the central banks might be somewhat undermined by cryptocurrency, and they will lose effective control over the economy.
- With the introduction of cryptocurrency, cross-border payments have become much faster and easier, without the worry of cumbersome additional charges. These people are moving to this newer option for their international payments using cryptocurrency.
- Given the advantages, the rise of cryptocurrency has posed a great deal of challenge to traditional banks, given the fact that they are no longer the sole option available for financial services.
- One positive aspect is that cryptocurrency, directly or indirectly, forced the banks to adopt newer and more innovative technologies to improve their services like blockchain in banking, and, in an attempt to stay relevant, It indicates a shift towards digital banking models that can reach a non-banking population that does not own the required documents or resources.
- With relatable ease and efficiency of the process involved, cryptocurrency might streamline the mainstream transaction processes that require much time and additional charges. The blockchain technology forming the base for cryptocurrency makes transactions much faster, cost-efficient and secure.
ASSESSING THE MIXED REACTIONS OF BANKS AROUND THE WORLD
In June 2021, El Salvador became the first country to accept Bitcoins as legal tender with their adoption by the banks in the country. This was followed by the recognition and regulation of cryptocurrency, such as Bitcoin, by the country of Cuba and the integration of its banking systems with the necessary requirements. However, countries like China and Vietnam, in consultation with their central banks, have declared all transactions with cryptocurrency to be illegal and imposed a ban on cryptocurrency. Elsewhere, the collapse of Silvergate Bank, which is a cryptocurrency-friendly institution, shook the whole financial community. Several other banks, like the Silicon Valley Bank and Signature Bank, faced intense scrutiny upon entering the cryptocurrency market.
In contrast, several banks have successfully adopted cryptocurrency. Goldman Sachs launched its cryptocurrency trading desk in 2021 with the aim of expanding its market, and it has seen remarkable growth. In 2023, BBVA became the first global bank to offer cryptocurrency asset custody services in Spain. It provides end-to-end management of digital assets. UBS, reputed as the largest private bank in the world, also launched its blockchain in banking to provide asset management services. The UK government is implementing favorable laws to encourage the use of cryptocurrency and crypto assets.
With the prediction that by 2028 the cryptocurrency market will touch a staggering value of 328.80 million, with a user penetration rate of 22.20%, banks all over the world are looking for cryptocurrency-adoption in banking.
CHALLENGES TO CRYPTOCURRENCY ADOPTION IN THE BANKING INDUSTRY
Gauging the present scenario, it is evident that cryptocurrency adoption is still in its early stages within the banking industry. The banks are still hesitant and suspicious due to the anonymity of the cryptocurrency and the lack of a regulatory framework. However, the future of banking will definitely look different than the present.
- Security concerns have also urged several banks to take a step back from integrating cryptocurrency. With more money deposited in the form of cryptocurrency, the risk of losing an amount to hacks will also increase.
- Whereas most of the banks have KYC/AML protocols as a protection against money laundering, these measures may not adequately provide the required safeguards in decentralized and anonymous spaces like blockchain networks.
- More often than not, the users tend to be ignorant of their rights or cryptocurrency regulations and rules of the services, consequently, the risk of scams is high.
Some institutions, like the Bank for International Settlements, pointed out the cons of cryptocurrency, like the lack of stability in its price, the high energy consumption, poor security, fraud, etc. In contrast, several experts suggest that blockchain technology can upgrade bookkeeping processes, compliance procedures, etc.
CONCLUSION
While cryptocurrency has somewhat caused banking system disruption, it is anticipated that the total elimination of the banking sector would definitely pose grave security challenges. The banks should evolve newer technologies to adopt the advantages of cryptocurrency into their systems and form cryptocurrency regulation. Now, it is left to be seen whether cryptocurrency provides a viable alternative to traditional banks or not.
