Banks and Crypto: The Love-Hate Relationship Shaping the Future of Finance

We simply don’t trust banks like we used to. That distrust has greatly contributed to the worldwide acceptance of cryptocurrencies, which promise to do away with financial intermediaries. Instead, they would establish “the internet of money” – an egalitarian network of interconnected users who only need to fulfill the minimum requirements (basically, have internet access) to directly participate in the global financial market and enjoy the benefits of lightning-fast and transparent transactions, low fees, no international boundaries, absolute anonymity, and top-notch security.

But does that mean cryptos are here to replace banks? The short answer is – probably not. If there is something we know for sure about capitalism and its banking sector, it’s that its ability to adapt and evolve by incorporating criticism is truly endless.

Besides, there’s a fair share of enthusiasm on the other side, too: Most crypto project developers would jump at the opportunity to cooperate with conventional financial institutions such as banks and payment tech companies like Visa.

Still, when can we realistically expect crypto banks to become mainstream? What are the obstacles to overcome on that road, and what advantages and disadvantages would such development bring to banks and end-users?

If You Can’t Beat ‘em…

It’s obvious even to a casual observer that the current attitude banks and governments have toward cryptocurrencies is riddled with contradictions, and it’s easy to understand why. Cryptocurrencies and the blockchain technology they’re based on entail a range of innovative qualities that can both harm banks’ interests and help them tremendously.

Although the initial reaction of most financial experts to the cryptocurrency phenomenon was decidedly negative, with examples such as JPMorgan Chase’s CEO Jamie Dimon calling Bitcoin a “fraud” and “worthless,” many have since realized that their potential is simply too great to be ignored.

Harnessing crypto power to enhance profits and eliminate the looming risk of being replaced by it seems to be the road more and more financial institutions are taking. Unsurprisingly, smaller lenders have been quicker to adapt and offer their users a straightforward and safe way of trading or holding crypto and even taking out crypto loans.

Disrupting the Financial System

As mentioned, cryptocurrencies’ unique properties are potentially extremely disruptive, and their impact on the entire banking sector is tough to predict. Benefits for the end-user can’t be simply translated to benefits at the institutional level, and not just because a regular Joe’s interests differ from those of a multinational investment bank.

Let’s take Bitcoin as an example. Bitcoin’s supply is finite – only 21 million coins, of which 19 million have already been mined. Once they’re all out, there will be no additional supply; this is in stark contrast to modern fiat currencies, which can be – and frequently are – printed whenever a central authority (the Federal Reserve in the case of the US) deems it necessary.

We could perhaps liken this property of Bitcoin to the US dollar before the Gold Standard was abandoned. This inflexibility comes with perks and detriments, some of which have yet to be discovered and understood. However, unlike the US dollar, Cryptocurrencies are decentralized, meaning that national governments can’t influence their flow and value – for better or worse.

Likewise, cryptos’ famed privacy is a double-edged sword, posing a considerable challenge for both banks and governments, and society as a whole, since they can be easily used for financing illegal activities of all kinds.

Another obstacle to implementing crypto hides in its incredibly fast development. The innovation in blockchain technology is so rapid that the laws meant to regulate it can hardly keep up.

Benefits of Crypto in Financial Services

The list of potential pitfalls goes on. Why are banks so interested in incorporating cryptocurrencies, then?

First of all, it looks like cryptocurrencies are here to stay – whether bankers like it or not. Usually, when we make money transfers, we rely on banks as intermediaries to complete the transactions. However, with blockchain technology, the need for third parties (i.e., banks) is practically eliminated – and so is their profit from transaction fees. In other words, staying out of the crypto market is already costing banks dearly.

Ideally, blockchain-based transactions would make the financial industry more transparent, given that all activities are recorded in a public ledger, and the records (mostly) can’t be tampered with. And while it would be naive to assume banks would welcome this transparency, with so many examples from the past testifying to the contrary, they do stand to benefit from some of its aspects, such as easier fraud detection. Banks can leverage blockchain technology and machine learning to minimize risks and monitor transactions with higher precision.

Finally, the blockchain can help banks and clients decrease costs. By adopting this technology, financial institutions will be able to speed up their internal processes and offer lower fees to clients as a result. On the downside, the already exorbitant blockchain energy costs would increase significantly, potentially nullifying this advantage.crypto

What About the End-User?

While cryptocurrencies have the potential to create a more open and accessible financial ecosystem, it’s unlikely that blockchain technology will completely erase the need for financial intermediaries.

The consequences of banks adopting cryptocurrencies for the end-users will probably be mixed: The cryptocurrency market will likely become less volatile, more secure, and more accessible to the average users, while the level of anonymity will decrease. One thing is certain – the revolutionary potential of cryptocurrencies many fervent backers have hoped would transform the sector entirely will certainly be dampened, if not removed altogether. We’ll see soon enough.