Since their emergence, cryptocurrencies have been deemed as rivals to the traditional banking system, offering similar services and functions, using a decentralised economy as opposed to the banks’ centralised authority.
Nowadays, most businesses adopt cryptocurrencies in one way or another, such as a payment method, collateral, value creation using blockchain technology, and more.
The crypto world boomed over the last few years while banks kept resisting them. However, some economies were positive towards this trend and adapted to contemporary changes.
In this article, we will shed light on the differences between cryptos and banks and discover if there is any hope for both to work together.
How Do Cryptocurrencies Work?
Cryptocurrencies are digital means of payment that do not involve a central authority like a state or a commercial bank. This concept works by transferring cryptocurrencies and tokens between users directly (peer to peer) by executing money transfers between crypto wallets.
This innovative approach is built on fundamental principles like decentralisation, shared control, anonymity and security.
Therefore, transacting with cryptos is considered safer in terms of identity preservation, where both parties do not share any personal information. Moreover, the blockchain, where all crypto transactions are stored and tracked, does not require any personal information.
Transacting with crypto is almost immediate and irreversible, which make them highly demanded by exchange platforms and service provider across the world.
Why Do Banks Oppose Decentralisation?
Banks and centralised authorities have opposing principles to those of decentralised economies, besides the natural rivalry these currencies create. Therefore, banks have always been avoiding cryptos, and states have a series of illegalising Bitcoin and other cryptos.
Unlike crypto transactions, central banks control all traditional transactions between two parties, where all information shall go through a central authority. These entities have the power to process or reject these transactions besides storing personal information.
Cryptocurrencies are unregulated and highly volatile, which theoretically harms the free market as prices may sharply increase or decrease without prior notice or indicators.
Moreover, there are fears of misusing cryptocurrencies in money laundering and illegal financial activities since they do not require any personal information.
On the other hand, central banks’ procedures include the know-your-customer standard, which requires financial institutions and providers to collect the personal and financial information of their customers.
Current Financial Environment for Cryptos and Banks
After the infamous crypto crash in 2022, multiple currencies and ecosystems crashed, including one of the largest crypto exchanges and hedge funds, besides the massive crash of LUNA. After these events, investors lost faith in cryptos and got demotivated to trade with cryptos.
2023 was supposed to witness recovery for the crypto scene, but it was some commercial banks’ turn to show poor performance.
In the spring of 2023, several US banks, including Silicon Valley Bank and Silveragete Bank, were accused of mismanaging their cash and collapsed as a result.
Other banks also started failing, and some of them were dealing in cryptos, which added more confusion about the impact of decentralised economies on banks.
This also witnessed a dispute between crypto enthusiasts and the US Securities and Exchange Commission, which is trying to add Bitcoin to the SEC’s regulated securities. However, the crypto community oppose this initiative because this means centralising the currency and making it subject to a central authority, which contradicts the concept of decentralised economies.
The Potential of Cryptocurrency in The Banking System
Most resistance against cryptocurrencies comes from developed countries and economies, while growing economies seem to be positive about dealing with cryptos.
Countries like El Salvador and India have legalised Bitcoins and are adopting them as a legal ledger in hopes that this movement would boost their economies.
Moreover, large hedge funds and investment banks are applying to the SEC to add Bitcoin to the list of spot ETFs as a tradable security. These calls mean that some ETFs will be denoted in Bitcoin for spot exchange. Shall these requests get approved, the Bitcoin price is expected to increase, boosting confidence in major cryptocurrencies.
Cryptocurrencies disrupted banking systems and centralised authorities, introducing new working mechanisms that contradict central and commercial banks.
Recent changes in the scene have witnessed some positive signs of a treaty between these two economies. Some countries are adopting cryptos, and some significant financial players are calling for trading in digital currencies.
However, if cryptocurrencies manage to shake central economies in the span of 15 years, then we can expect a lot of developments in these currencies, including the banking sector.