Cryptocurrency a threat to traditional banking

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Is Traditional Banking Under Threat from Cryptocurrency?

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Is Traditional Banking Under Threat from Cryptocurrency?

Have you noticed that more and more online businesses seem to state that they will accept Bitcoin as payment?

This is cryptocurrency in action, a new generation of internet-based currencies which have grown in popularity over the last few years. You can’t touch it or physically hand it over in any way, but you can use it to trade online.

It’s a far cry from the traditional view of banking, where cash, coins and possibly gold might be stacked in a vault just waiting to be withdrawn, but do these new cryptocurrencies represent a threat to those traditional banks?

We take a keen interest in all things technology, especially where it can impact how we build and use apps. Cryptocurrencies have already made their way into trading within FinTech apps, so let’s examine how it stands against those traditional banks:

What is cryptocurrency?

Cryptocurrencies like Bitcoin, Dash, Litecoin and several others are encrypted digital currencies. A feature of these currencies is that they are decentralized – whereas most traditional currencies are controlled by a centralized government, therefore able to be regulated by a third party.

Digital currencies are created and transacted in open source environments, where they are controlled by code and rely on peer-to-peer networks. No single entity can affect the currency.

How does cryptocurrency work?

This can be a somewhat tricky thing to get your head around, particularly as we’re all so used to the traditional banking system. Currencies like Bitcoin work by storing all transactions from the inception of the currency on a public ledger. The ledger uses cryptographic techniques to ensure that records are accurate and all owner’s identities are encrypted.

Cryptocurrency owners each have a “digital wallet” and it is the job of the ledger to ensure that those wallets show an accurate spendable balance. It also checks transactions to ensure that the owner is only spending their own wallet balance.

The next logical question is, where exactly do these currencies come from? What gives them their value? Cryptocurrencies are created when a “miner” solves a complex computational problem to confirm a transaction and add it to the ledger. Currencies have a limit (such as Bitcoin, which is 21 million Bitcoins), but you can think of them as all having been created when the currency was created initially, meaning that miners are being rewarded with a new piece of that 21 million when they confirm a transaction.

What? You may be saying — How does this make sense? Where does the value come from? The short answer to this is from the wider community of the particular cryptocurrency. By backing the value of the currency and agreeing to use it as money, they give it value. (Hey, there’s been nothing concrete backing many traditional currencies since being taken off the gold standard!).

Thus far, the value of many of these cryptocurrencies has skyrocketed. According to NPR , if you had bought $1000 worth of Bitcoin in 2020, that investment would be worth $20 million today. There are even ATMs around for Bitcoin – put your regular currency in along with your phone number, then get a receipt back for the purchase of Bitcoin. A check of the digital wallet on your phone should reveal your purchase there in the balance.

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What are the implications for banks?

A major shift has happened in how people can do business and make transactions. Suddenly, the value is able to be exchanged outside of the traditional banks in the flash of a mobile phone.

As Chris Skinner, author of Digital Bank puts it:

“People who could not access trade and finance ten years ago can do so today. This will lift many out of poverty.”

This is a key point — people no longer have to go, cap in hand, to a traditional bank if they need financing. Peer-to-peer networks, including those based in cryptocurrencies, are becoming more common and those who might be turned away by traditional banks now have another way around financing.

Are traditional banks feeling threatened by these new cryptocurrencies?

In short, yes. Those who are paying attention have already identified cryptocurrencies as an industry threat. French banking giant, BNP Paribas released a report where they discussed the technology behind cryptocurrency and how it could lead to making the traditional banks redundant.

An analyst for the bank wrote about the software behind cryptocurrencies stating that it “should be considered as an invention like the steam or combustion engine, that has the potential to transform the world of finance and beyond.”

A UK Banking Report concludes that cryptocurrencies definitely represent a threat to traditional banks, most especially if they ignore new consumer behaviors and preferences when it comes to how they transact and transfer money.

The report states:

“Bitcoin users can handle many of their daily payments needs themselves, without the need for interaction with banks, and avoiding the need to incur bank fees. In the same way, the value stored in PayPal accounts moves outside of the bank’s payment systems, depriving banks of valuable payments revenue.”

There are a few issues cited with these cryptocurrencies, such as their perceived “haven” status for possible perpetrators of illegal activities, a relatively low market cap (Bitcoin’s is somewhere around $3.4 billion) and a sense of volatility with the value of the currency. The suggestion on NPR with regard to investing in Bitcoin was:

“Never, never, never invest more than you’re willing to lose because it could go to nothing.”

Still, traditional banks are becoming very much aware that they’re ceding some ground to the new wave of cryptocurrencies. There are many people out there who absolutely couldn’t wait to find a way around being beholden in some way to a big bank and these people are taking up new options with enthusiasm.

What do traditional banks need to do?

It comes back to what Chris Skinner talks about in Digital Bank ; in order to remain relevant, big banks need to become digitized and offer similar real-time services to what people are demanding with cryptocurrencies.

He points out that traditional banks have often been guilty of customer-unfriendly account manipulations, such as applying debits before credits then charging fees for insufficient funds. In a digital age, customers can actually see this happening by glancing at their mobile phones – the big banks won’t be able to get away with such practices for much longer.

Traditional banks need to up their game in areas such as customer service, digital offerings and fees charged. If they’re not thinking of digital solutions beyond the standard mobile banking app, they run the risk of being left behind.

American Banker acknowledges that these cryptocurrencies can present a threat, but also some valid opportunities:

“The roles banks could play include processing payments, providing escrow services, facilitating international cash transactions, helping customers exchange their money for Bitcoins, and even making loans in the currency.”

While there are questions about the volatility of digital currencies and their potential to run afoul of financial regulations, their increasing popularity signifies a shift happening in consumer preferences. Traditional banks need to be onboard with digital and offering the instant, mobile services that many are demanding.

Final Thoughts

Is traditional banking under threat from cryptocurrency? Yes and no. Most big banks are now acknowledging that the technology behind cryptocurrencies should be treated as the next big thing, perhaps like the invention of the motorcar to the railroad.

At the same time, digital currencies have downsides like a perceived volatility and some uncertainty around whether regulators will need to step in.

However, banks who don’t want to go the way of the early Twentieth Century railroads, those who made the mistake of failing to see the motorcar as a threat, would be wise to pay attention to consumer preferences. Getting onboard with digital trends may help to mitigate the cryptocurrency threat.

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Cryptocurrency a threat to traditional banking?

Blockchain organisation Ethereum have recently announced one of the first cryptocurrency debit cards. Banking institutions have begun to recognise the game-changing significance of cryptocurrencies and have stated their concern over it.

In 2020 the Bank of America commented that they consider this form of transaction “speculative” and “risky“. However, they also predict that “substantial expenditures” would have to be made in order to adapt financial systems in the wake of blockchain’s emergence into the mainstream.

At the start of 2020, there was a significant dive in the cryptocurrency market. Even blockchain-focused financial publication CryptoCompare considered this as a sign of unpredictable volatility This volatility threatened to undermine blockchain’s viability. However, the values of affected crypto coins have begun to steadily rise in a series of “bull runs” that have created renewed interest in digital coins.

Etheruem Live Chart

Bullish Sentiment

Each week, sites such as Crypto Daily with a vested interest in the success of crypto have predicted the prices of the top 10 cryptocurrencies to rise by significant percentages. The fall in market value of early 2020 has actually given the market a renewed interest in investment. Independent investors are buying heavily into cheaper coins in anticipation of price hikes not seen on the traditional stock markets.

The Bank of America refuses to embrace this new form of currency and has banned approximately 17,000 financial advisers from investing in cryptocurrency.

Their reluctance to embrace blockchain technology is understandable. The market is clearly volatile. The very system eliminates customer need for third-party intermediaries which banking institutions provide.

It remains to be seen if this new, unpredictable financial system can become a mainstream threat to stable banking corporations. In the meantime, smaller investors are taking advantage of the series of bull runs by buying cryptocurrency stock while it remains low in value. It remains to be seen if these investments will see a profit.

Speculation is high as to which coin (if any) will soon dramatically rise in value. Crypto Daily have made educated predictions, but this advice is not safe enough to rely upon. From the broad rise in coin values, it appears that investors are spreading their capital across multiple blockchain wallet systems.

Is Cryptocurrency A Threat To The Traditional Banking System?

Cryptocurrency which hit the mainstream scene several years ago has steadily grown in popularity since then, with more online businesses than ever before beginning to accept Bitcoin and other cryptos as payment method. While cryptocurrencies may be grouped with more traditional forms of banking, the two are opposites, and this has raised the question as to whether cryptocurrencies are indeed a threat to the traditional banking system.

Cryptocurrencies such as the above-mentioned Bitcoin, very much the leader of the pack , as well as Ethereum, Litecoin, and the many others are digital currencies. Their main attraction is that they are decentralized and therefore not controlled or regulated by any governments, financial authorities or third parties. Therefore, many people, especially those already in the crypto scene, see the use of these digital currencies as being more advantageous than traditional banking methods. In fact, the technology is gathering pace, with more and more ordinary folk from all over the world joining the crypto scene by registering with licensed brands like Luno and using their bitcoin wallet .

This has somewhat posed questions to banks and their traditional methods. These are indeed questions rather than threats because as things stand, you could say that the two banking methods can share the stage and work together. Cryptocurrencies and the technology behind them have caused an undoubted shift in the sector however, changing the way people must conduct their business and therefore presenting alternative and often more advantageous methods.

For example, obtaining finance from a traditional bank has often proved difficult for many, with the strict criteria set often proving to be a stumbling block. However, thanks to cryptocurrencies, there are peer-to-peer lending networks which people can now access to obtain finance. These networks often offer solutions to those turned away by traditional banks, which has seen their popularity skyrocket.

While traditional banks have often embraced the latest technology, which includes mobile banking, mobile pay and more, you could say that cryptos are always one step ahead in this respect, therefore meaning that banks will need to up their game, or work with cryptocurrencies and digital funds providers to embrace the new.

With the world becoming ever more digital, banks undoubtedly need to follow suit. This ultimately means they may have to follow the lead of cryptocurrencies, especially as everything crypto-related happens in real-time, something which isn’t the case where traditional banks and their methods are concerned.

There’s no doubting that cryptocurrencies and blockchain technology have the potential to change the banking world and how people conduct their businesses daily basis. However, as things stand, traditional banking methods have the trust of the general public, for the most part, giving them an opportunity to learn from digital currencies and the advantages they bring to the table.

If traditional banks were to up their game where technology is concerned, as well as allowing banking to happen in real-time, while also reducing fees and costs, there’s no reason why they can’t stay relevant. This should lead to a world where both banks and cryptos can flourish alongside each other, rather than them being in direct competition.

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