Almost ever since the launch of Bitcoin in 2009, crypto enthusiasts have heralded its potential impact on traditional banking. The technology is still in its infancy, at least compared to traditional banking, but it has caused a stir in regulatory and real terms.
For now, very few traditional banks have integrated crypto into their products or services, but many have started to investigate the launch of Central Bank Digital Currencies, while governments and securities commissions continue to look at how to deal with crypto, starting with stablecoins.
The Rise Of Cryptocurrency
Since Bitcoin’s launch in 2009, crypto has come a long way. Its price has risen from nothing to around $100,000 and it is directly accepted by thousands of businesses around the world. It has spawned crypto games and has become a popular investment vehicle, while in crypto casino websites it is used for consumer transactions while offering anonymous and private, borderless payments, showing the potential it has for the rest of the financial industry.
According to the Bank of England, there are now more than 17,000 crypto asset tokens in circulation, and a total market capitalization of more than $3 trillion, to date.
Reduced Reliance On Banks
Cryptocurrencies are decentralized. They have no banks and no central groups or parties that manage or initiate payments. This means that individuals have greater power to make and receive payments the way they want to.
In contrast, banks dictate the terms of payments. They decide everything from who can send and receive money to the currencies that are used, the prices paid, and even how long the transactions take. With cryptocurrency, the payer and the payee agree between themselves and then establish a smart contract, on the blockchain, that meets these terms.
When the terms are met, the contract is completed, and the payments set. Individuals can agree on the currency, and exchange rate, and, by initiating and completing the smart contract in their own time, they can even determine the speed at which the payment is sent.
Banking Features For Unbanked Citizens
There are 1.4 billion unbanked citizens in the world and many more are underbanked. This means potentially as many as a quarter of the global population do not have access to everyday banking facilities.
This means they are paid in cash or have to use expensive services like cash checking services to gain access to their money. Because cryptocurrency doesn’t rely on financial institutions, which can have very high account setup requirements, anybody with Internet access can set up a crypto wallet to make and receive payments. This can be especially useful for remittances sent back home to family members.
This type of payment is often done using Western Union and other transfer services but these can be expensive and restrictive.
Reduced Transaction Fees
This is another way that cryptocurrency can affect the traditional banking system. Compared to cryptocurrency, banks are expensive. Previously, users had little choice but to pay the fees for bank transfers. Retailers, merchants, and businesses were forced to meet credit card fees. Fees could be as high as 3%, and even higher for individuals wanting to send overseas payments quickly.
Cryptocurrency payments typically cost a fraction of 1% of the amount being sent and the rate is the same no matter how far away the recipient is. The Ripple cryptocurrency has marketed itself as being the SWIFT of cryptocurrency and has partnered with banks around the world. Its system can be used by traditional financial institutions to send and receive payments at minimal costs.
But SWIFT itself has been trialing digital asset transactions itself, and this would likely lead to cheaper, faster transactions on traditional financial networks.
Cross-Border Payments
Cross-border payments have long posed challenges to individuals and their banks. The Dollar, Euro, Yen, Australian Dollar, Canadian Dollar, and Pound are the most commonly used currencies in the world. But, even using one of these currencies, users have to exchange them for a local currency that is used in the recipient’s country.
Sending money from the US to the UK typically means using dollars to buy pounds before sending them. This incurs exchange rate costs as well as transfer costs. And because the payment involves several banks and payment gateway providers, it can take several days to complete successfully before the recipient gets the money.
Crypto still requires money to be exchanged but payments are sent almost instantly from one side of the world to the other, or from one end of the road to the other. As banks start to use blockchain payments will speed up, and we should see an erosion of typical banking hours.
Expanding Regulations
Cryptocurrency is largely unregulated. Governments and securities commissions around the globe have been scrambling to try and update their policies and help ensure that consumers can enjoy some degree of protection. The fact that cryptos are decentralized means there will always be some risk involved in their dealing, and this has left agencies struggling with the best way forward.
Central banks have called for regulations to start with stablecoins, which are pegged to the value of fiat currencies and other assets, supposedly offering greater protection. They are also seen as a stepping-on point for most investors, as they are commonly purchased using fiat and then used to buy cryptos like Bitcoin and others.
The Potential Launch Of CBDCs
Another area where central banks are getting heavily involved is in the possible development of Central Bank Digital Currencies. These aren’t strictly cryptocurrencies. They will be managed and maintained by central organizations.
However, they are digital equivalents of traditional currencies. They will be run on digital ledgers, like blockchain networks, and they will provide many of the same benefits as cryptocurrencies.
The Bahamas, Jamaica, and Nigeria have already launched CBDCs and other major economies like Japan, India, Brazil, Russia, and Turkey are also investigating these unique products. Different countries will likely have different types and styles of CBDCs with some integrating with existing payment methods but potentially speeding up and lowering the cost of transactions.
Others may be distributed directly to users’ digital wallets, which could also facilitate peer-to-peer payments, making them even more similar to cryptocurrencies as we know them.
It could take years for some countries to develop their own CBDCs, but it will lead to people and institutions learning how to deal with this type of digital payment system and could ultimately lead to the widespread use of cryptocurrencies, even by major financial institutions.
Conclusion
The introduction of Ether and Bitcoin exchange-traded funds marked something of a turning point for cryptocurrencies, bringing them greater credence, enhancing the level of institutional investment into the market, and bringing them under the spotlight.
The introduction of CBDCs will further enhance the credibility of cryptocurrencies, and as countries start to investigate the setting up of cryptocurrency strategic reserves, we are likely to see digital currencies becoming even easier to trade.
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