The use of digital assets not governed by the traditional banking system, based on cryptography and secured through encryption, has become popular as an alternative to mundane banking. Banking, as an industry, certainly, is not new, having been initiated centuries ago. Crypto, on the other hand, might be new to us if it weren’t for the fact that it has gained popularity easily over the last decade. This is how it could further impact the banking industry today.
What is Crypto?
Essentially, cryptography is the basis for crypto assets, a secure type of digital money. The first crypto, Bitcoin, was presented to the world in 2009. Unlike regular currency, crypto is not subject to nation-states or central banks. The method by which crypto-based payments are done is through a technology called blockchain, which is essentially a ledger system of transactions where blocks of data are added through each transaction, creating a chain of transactions that makes tampering with records nearly impossible.
Crypto can be acquired, swapped on exchanges, and stored in online wallets. A network of dispersed computers checks and records these transactions, eliminating the role of third-parties (for example, banks). While relatively new, crypto is already in use for many purposes, including as a security-driven, decentralised form of currency.
The rise of crypto
Crypto is disrupting the role of financial institutions with decentralised, blockchain-based systems that deliver borderless transactions, stronger security, and greater financial inclusion, threatening banks and digital commerce that have traditionally operated as centralised third-parties. On technology that disintermediates, crypto negates the need for financial institutions because users have direct ownership over their assets.
Like so many other technological catalysts, however, crypto has stimulated novel ways of thinking. The ultra-decentralised nature of blockchain technology enables it to offer transparency and efficiency that traditional banks can only envy. Many of us will, therefore, either be transferring value using them in the future or locking away some for storing as wealth.
Crypto vs. traditional banking
Let’s compare the key features of crypto versus traditional banking:
● Global Usage
Fiat currencies are accepted on a worldwide basis. Fiat currencies are the most widely used and preferred means of exchange in large parts of the world. Most individuals recognise them as money, and, nearly, everybody knows what they are. They are also stable and more embedded in our worldwide economic structure. Crypto is new, can be accepted, and has quickly gained acceptance for electronic commerce. They can be used for direct purchases of goods and services, along with payments for air flights and hotel reservations.
● Decentralisation vs. Centralisation
Conventional currencies are centralised systems, controlled by nation-states through their governments and central banks. Centralisation is marked by a single governing authority (e.g., the Bank of England) that controls the money supply, sets the interest rate, and puts into place other monetary policies. Centralisation provides stability but makes the currency susceptible to manipulation, inflation, and recessions.
Crypto is, however, underpinned by decentralised technologies such as blockchain that permit transactions to be verified and recorded across an internal network of thousands of distributed computers, mitigating the need for a central authority and the vulnerabilities associated with intermediaries. Decentralisation increases security by removing a single point of failure, and it boosts trust by reducing the risk of corruption or manipulation.
● Transaction Cost and Speed
Fiat transactions, particularly, cross-border transfers often involve lengthy processes limited by banking hours, currency conversion fees, and service charges. Crypto enables near-instantaneous transactions at minimal costs, depending on the network used. While fiat transactions can accumulate various fees, crypto transactions generally incur lower fees, making them more cost-effective.
Disrupting traditional banking with crypto
Let’s explore how crypto is disrupting the traditional banking sector.
● Decentralisation
One of the most fundamental features of crypto is that it is not centrally controlled, like banks. They allow peer-to-peer transactions without having any intermediaries, in the traditional sense, which can seize funds.
● Peer-to-Peer Transactions
Peer-to-peer crypto also does away with intermediaries, reducing transaction times but, more importantly, transaction fees.
● Lower Transaction Fees
Traditional banks often charge substantial fees for services like wire transfers and currency exchange. In contrast, crypto transactions typically incur lower fees due to the elimination of intermediaries. This cost efficiency could drive more people to adopt crypto, posing a challenge to the revenue streams of traditional banks.
Crypto-Banking advantages
Let’s examine the various benefits of crypto in the banking sector.
● Financial Inclusion
Crypto has democratised financial access and inclusion by lowering entry barriers and making financial services more accessible.
● Cross-Border Payments
Crypto payments allow for much more rapid and cheaper cross-border transactions than those that would have required a traditional bank account. People and businesses can move money abroad with more flexibility and less cost, bypassing the intermediaries and the hefty fees that are often part and parcel of those operations. This could represent a true innovation in the remittance sector, delivering considerable cost savings to those who send money abroad.
● Banking Access for the Unbanked
Millions left out of the mainstream banking world have no means to send or receive money securely without a bank account. Those are precisely the people to whom crypto can bring a global network game that’s easy to enter, as long as you have access to the internet.
Crypto challenges
While crypto offers significant benefits to the banking sector, it also presents several challenges:
● Volatility
Extreme and sudden ups and downs in crypto prices are of greatest concern, rendering crypto inappropriate as a stable means of exchange.
● Scalability
Scalability is an issue as demand for crypto grows; for example, transaction throughput can bottleneck, causing higher fees and longer confirmation times when it’s busy.
● Security
The technology underpinning crypto is exceptionally secure: a genius, trustless system known as blockchain. Yet, the wider crypto world is cyber-attack-friendly, and flash crashes still happen, along with scams, hacks, and other kinds of frauds.
● Regulatory Uncertainty
Though its potential is considerable, crypto exists in a legal shadowland where a lack of consistent and clear regulation can hobble businesses and users, potentially, holding back widespread adoption.
Conclusion
Crypto versus old money are both forms of secure payment, so the choice of which one to use is a complex decision that depends on their advantages and drawbacks. One key distinction is that old money is government-backed, while crypto is computer-generated, with both offering advantages. Old money is stable, widely accepted, and offers consumers protection through legal and administrative actions. It is limited because it costs more, and it is not widely available in developing regions. Crypto offers consumers more control over their money, lower costs, and wider opportunities for financial inclusion. Crypto is volatile but it also allows more privacy than old money, along with offering protection from malicious actors which only governments can avert. Whether to use old money or crypto depends on your needs.
The reality is that crypto is not a fad, and it stands as a major and discernible challenge to the traditional banking model. It’s important to note that the replacement of the traditional banking model by crypto is a heavy task. Regulatory, technological, and adoption barriers remain demanding challenges, to look each other in the eye, and determine who will prevail. That said, crypto’s ideology combined with traditional banking’s scalability and existing infrastructure might lead to a merging of the duo, creating a unique hybridised financial ecosystem with elements of each of their approaches. Only time will tell what eventuates, but the one certain thing is that the financial sector is undergoing a major metamorphosis that will require all players to be nimble and adaptable.
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Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay the author’s employer, or other groups or individuals. ZebPay shall not be held liable for any acts omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness, or of the results obtained from the use of this information.