With the coming of blockchain technology and digital currencies, we have seen central banks, traditional banks and the financial system as a whole complaining about how cryptocurrency and blockchain technology could affect their financial services.
Bitcoin and other cryptocurrencies seem to be changing the way the banking system is seen around the world. With a few clicks, a user could send cryptocurrency like Bitcoin, Ethereum, and other digital assets without having to jump through hoops that are evident in the traditional banking industry, which were instilled by the central bank and financial institutions. Some banks have started the process of adapting by creating central bank digital currency to fill in the gap, while some have placed bans on cryptocurrency.
Is Cryptocurrency a threat to banks?
With the coming of cryptocurrencies, people do not have to depend on traditional banking or financial institutions before they can access financing, send money, and do much more.
Peer to peer networks and even fintech companies offer their customers access to services all over the world in real-time, something that the traditional banking system does not offer. Consumers can make a payment, trade, access finance opportunities, assets, access credit and do other transactions without breaking a sweat or jumping through hoops with crypto transactions. Transaction costs in some blockchains are far affordable than what is obtainable in the traditional financial system. This poses a big issue to banks.
Many central banks have taken a look at crypto transactions, and they feel that they may be a threat to traditional banking like Movie Streaming became a thorn in the flesh for the defunct Blockbuster. Different countries’ Central banks are reacting to cryptocurrencies differently. In some countries like Nigeria, banks have been warned to avoid aiding crypto transactions done by their customer. The Chinese government has blatantly banned the mining of Bitcoin in the country and created regulatory systems to deter the growth of cryptocurrency. Countries like the US are taxing Bitcoin and crypto transactions, while other countries are not bothered with the transactions, for now.
Many of these central banks that are fighting crypto transactions have decided to create central bank digital currency.
How Will Cryptocurrency Affect Banks
Investors are seeing the tremendous use cases of blockchain technology, which have removed the need for intermediaries that are common in the banking industry.
Crypto transactions will affect the banking industry by injecting efficiency into the following transactions:
• Clearance and Settlement Systems
• Credit System
• Trade Finance
• Customer KYC and Fraud Prevention, and much more.
What will banks do with Crypto?
When movie streaming technology came along, some big brands like Blockbuster fought it, thinking that they could stop users from utilizing movie streaming companies and staying glued to the cassette renting industry. That didn’t work from what history says.
Banks need to up their game if they are to compete with the innovations that blockchain technology and cryptocurrencies offer. Some traditional financial institutions like Goldman Sachs are actively getting involved in crypto and DeFi.
JP Morgan is also an active player in the industry. Swedish Central Bank is thinking of releasing its e-krona.
Instead of fighting crypto, DeFi, and blockchain technology, banks should consider utilizing their functionalities and use cases to their advantage.