When Bitcoin, the first cryptocurrency, was introduced in 2009, no one knew its potentials. Most people saw it as a project that wouldn’t make much impact in the world. However, they were proven wrong. Today, cryptocurrencies are one of the major trends in the financial realm. In fact, it is said that crypto boasts of features that could see it replace fiat and, of course, banks. But how? How will crypto affect banks?
Crypto will affect banks in several ways. First off, when cryptocurrency becomes widely adopted, individuals will switch from using paper currency to these digital currencies, thus making banks irrelevant.
People predict that Bitcoin, the most common crypto, will surge to $100k soonest. There are also predictions that indicate the wide adaptation of cryptos and the likely extinction of paper money. Of course, that means crypto would have a huge effect on banks. But how? I have explained this below. I have also highlighted a few details about crypto.
How Will Crypto Affect Banks?
To understand why people believe that crypto will one day replace fiat and banks, it is best you understand the advantages of cryptocurrency. But before we delve into that, let’s understand what crypto is first.
What is Cryptocurrency?
A cryptocurrency is a digital currency backed by cryptography (a network distributed across several computers) making it very difficult to counterfeit or double-spend. In essence, it is a system that allows for secure online payment, which is controlled in virtual tokens.
Crypto operates on decentralized networks that work on blockchain technology, a system of records that makes it very hard or impossible to trick the system. This architecture allows crypt to thrive outside the grasp of governments and regulatory agencies.
Cryptocurrencies hit the spotlight when it became evident that they could replace general currencies. The adaptation of these digital currencies continues to gain momentum due to the world’s inclination towards a cashless society. The fact that individuals nowadays transact with digital currencies like Bitcoin continues to conform suggestions that cryptos could be the future currency.
Advantages of Cryptocurrency:
In traditional business dealings, brokers, agents, and legal reps can add a lot of complications and expenses to what should otherwise be a simple transaction. There is paperwork, brokerage fees, commissions, and any number of other special requirements which may apply.
One of the perks of crypto transactions is that they are one-to-one affairs, occurring on a peer-to-peer networking structure that makes “cutting out the middle man” a typical practice. This results in greater clarity in establishing audit trails, less doubt over who should pay to whom, and greater accountability, in that both parties involves in a transaction each know who they are.
- Asset Transfers
One financial analyst describes the crypto blockchain as looking like a “large property right database,” which can on one level be used to carry out and enforce two-party contracts on commodities such as automobiles or real estate. But the blockchain crypto ecosystem may also be used to facilitate special modes of transfer. For instance, crypto contracts can be tailored to add third-party approvals, reference external facts, or be finished at a specified date or time later. And since you, as the crypto holder, have exclusive control over your account, this reduces the time and expenses involved in making assets transfers.
- More confidential transactions
Under the typical cash or credit systems, your entire transaction history may become a reference document for the bank or credit agency involved each time you initiate a transaction. At the simplest level, this might involve checking your account balances to make sure that you have enough funds. For more sophisticated or business-critical transactions, a more comprehensive audit of your financial history may be needed.
Another one of the great advantages of crypto is that every transaction you make is a unique exchange between two parties, the term of which may be negotiated and agreed upon in each case. What is more, the exchange of info is carried out on a “push” basis, whereby you can send exactly what you want to send to the recipient and nothing aside from that.
This protects the privacy of your financial history and safeguards you from the threat of account or identity theft which is more under the traditional system, where your details may be laid bare at any given period in the transaction cycle.
- Transaction Fees
You have undoubtedly gone through your monthly account statements from the bank or credit card Company and cringed at the level of fees imposed for writing checks and carrying out other transactions. Transaction fees can take a huge bite out of your assets, especially if you are carrying out many big-money transactions in a month.
Since the data miners (remote and separate computer systems) that conduct the number crunching which creates Bitcoin, including other cryptos, receive their compensation from the crypto network involved, transaction fees often don’t apply.
There may be some external fees involved if you use a third-party management service to maintain your crypto wallet, but another one of the pros of crypto is that they are still likely to be much less than the transaction charges generated by traditional financial systems.
Effects of Crypto on Banks:
Crypto like Bitcoin aims to revolutionize the way transactions are made. It aims to fix transaction issues, including high fees, security, smart contracts, slow transaction, etc. When crypto becomes adopted, you expect banks to have little roles to play as it doesn’t require an intermediary like the typical traditional currency. The adaptation of crypto will have less effect on banks. If only they decide to embrace it by creating services around its use.
Is Cryptocurrency a Threat to Banks?
Several things have been said about cryptocurrency since its introduction in 2009. Of course, one of those things is the possibility of cryptocurrency replacing paper money. If crypto is a threat to the government-backed currency, one might want to know if it is also a threat to banks.
Cryptocurrency becomes a threat to banks when fully adopted. If this happens, many individuals will shift from using the inflation-prone fiat to digital currencies, thus eliminating or reducing the need for banks.
Banks and other financial institutions are safe until crypto becomes widely adopted (something that might happen).