Banking on Crypto: When will we fully embrace the crypto revolution?

Summary 

• The demand for cryptocurrency came about when people realised that in a crisis, such as the one in 2008, they could not withdraw their own money as it simply wasn’t there.
• Cryptocurrency transaction speeds are significantly quicker than traditional banking. This is because cryptocurrencies essentially remove the middleman (the banks) from the transaction, thus making them purely peer-to-peer.
• The US federal reserve announced that they would introduce the digital dollar in the summer of 2021. Meanwhile, Europe has proposed and is currently developing the Digital Euro.
• Banks remain sceptical of how much they’ll be able to include themselves in the crypto movement, given the whole appeal of cryptocurrency in the first place is that it doesn’t involve banks.

2008 saw the largest global financial meltdown since the Great Depression. The period immediately following and up till today saw a brutal dissection of the traditional banking industry. It was discovered the symptoms that had seen pensioners lose their life savings had been caused by years of corporate greed and corruption.

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Sometimes, some things must be destroyed to create something new. Out of the rubble of the 2008 financial crisis grew something that has started to take form like a flower growing from a crack in the pavement over the past few years. Cryptocurrency, a decentralised, peer-to-peer digital currency, created to bypass traditional financial institutions.

The demand for alternative funding methods came about when people realised that in a crisis, such as the one which presented itself in 2008, they – the people- could not withdraw their own money because it simply wasn’t there.

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From that disaster, a fellow who went by the pseudonym of Satoshi Nakamoto created the first blockchain and the first cryptocurrency, Bitcoin. 

In 2008, barely anyone knew what Bitcoin was, let alone cryptocurrency. Fast forward just 13 years to 2021 and Bitcoin is the largest of the over four thousand cryptocurrencies in existence, valued at US$32,655.91. The market cap of all cryptocurrencies is expected to hit US$1087,7 billion by 2026.

These figures, amongst others, are why cryptocurrency exchanges are on the rise whilst traditional banking institutions struggle to keep up with the ever-changing market. To provide an idea of how just much the market is changing, financial experts predict that the compound annual growth rate will be approximately 12% by 2024.

Additionally, Coinbase - the world’s most popular crypto exchange – went public earlier this year, bringing cryptocurrency even more into the mainstream.

Traditional banking versus crypto banking

One of the most significant differences between traditional banking and crypto banking is transaction rates.

Cryptocurrency transaction speeds are significantly quicker than that of traditional banking. This is mainly because cryptocurrency essentially removes the middleman (the banks) from the transaction, thus making the transaction purely peer-to-peer.

Moreover, while traditional banks impose regulations, including fees, the decentralised crypto system allows users to hold onto their money anonymously. While this undeniably poses its own risks, namely security, it also offers a customer-centric approach as it protects the privacy of crypto users. That being said, governments worldwide are trying to bring about greater regulation in the world of crypto.

Digital currency

These changes have forced Federal Reserves worldwide to consider, and in some cases implement, the introduction of digital fiat.

The US federal reserve announced that they would introduce the digital dollar in the summer of 2021. Meanwhile, Europe has proposed and is currently developing the Digital Euro.

Euro E-Payment (Source: © Mani33 | Megapixl.com)

Christine Lagarde, President of the European Central Bank, has said that the Digital Euro would not replace fiat currency but rather compliment it. Lagarde added:

However, it’s important to note that this doesn’t mean the digital dollar will be a decentralised cryptocurrency. Instead, it will be the traditional fiat currency, only in digital form.

Banks resisting the change to cryptocurrencies

History has shown that significant and large-scale change happens in small steps. This is particularly true if traditional institutions are involved.

A study conducted by the Association of Certified Anti-Money Laundering Specialists found that approximately 63% of respondents who work in the banking industry viewed cryptocurrency as a risk rather than an opportunity.

Furthermore, banks are sceptical of how much they’ll be able to include themselves in the crypto movement, given the whole appeal of cryptocurrency in the first place is that it doesn’t involve banks.

INTERESTING READ: Is it time for Australian traditional financial institutions to embrace cryptocurrencies?

How can banks work with cryptocurrency?

While they may not be able to contribute to the transaction process, at least not for the moment, there may be some ways banks can embrace the crypto revolution.

One such way is security. Currently, one of the problems facing the crypto world is its vulnerability to criminal activity as well as the nearly complete lack of recourse a user has in the event of missing or stolen funds.

Therefore, banks have an opportunity to assist in fixing these security concerns as bringing them under bank supervision will reduce the amount of criminal activity currently associated with cryptocurrency.

Lastly, banks have the opportunity to bring those less experienced in cryptocurrency into the food by providing tools that help their customers adopt crypto.

This is a crucial juncture for traditional banking. If traditional banking institutions don’t get involved and start embracing the change which is occurring, it’s possible they’ll be left behind as the crypto system takes over.