Why is Cryptocurrency Better than Banks?
Banks have been a part of our lives for centuries. They safeguard our money and create wealth by providing credit to people and corporations. They also provide specialized financial services that answer a particular need. They are so ubiquitous that we take them for granted. Banks help make the overall economy efficient — acting as a depository, borrower, and intermediary. There are also other financial intermediaries like savings and credit unions, insurance, mutual funds, and pension funds. These financial intermediaries have taken some business from banks. However, banks still hold a big market share of the financial industry.
The Vulnerabilities of Banks
Banks use the money they have to make even more money for their depositors. In general, we want a secure and stable banking system that works smoothly. Unfortunately, the banking system has gone through some pretty trying times before and now. Mismanagement, fraud and money laundering have kept major banks in the cross hairs of regulators and government. Nobody wants a bank to go, rogue, because it erodes the confidence of depositors.
Investment banks play an important role in the economic development of a country. They bring together investors and companies that channel money into productive activities that create goods and services. After the Financial Crisis of 2007–2008, it was found that the unregulated activities of the large investment banks that led to the near-death of the economy. In the past years alone, several large banks ran into regulatory trouble and levied big fines. It seems that bankers have not learned from the debacle of the Financial Crisis. Banks are expected by their shareholders to increase market share and profits. Unfortunately, these have pushed banks to take on risky investments or commit illegal acts.
The Impact of Cryptocurrency
The mysterious Satoshi Nakamoto created and released bitcoin in 2009. The timing was uncanny. Supporters say that bitcoin was his response to the Financial Crisis. Satoshi envisioned a peer-to-peer system that eliminated the usual third party institutions to facilitate and verify transactions. Other cryptocurrencies like Litecoin, Ethereum, and Dash followed. Cryptocurrencies were revolutionary because they can be issued without a central authority or other traditional financial players.
The blockchain is the technology that supports cryptocurrencies. The technology enables all transactions to be logged and made available in a public ledger. All computer nodes usually verify all transactions. This ensures transparency and prevents fraud. Details of a transaction including its source, destination, and timestamp are added to a block. Blockchain technology lets a user transfer digital assets to another user. This process of adding and verifying blocks continues 24/7. The blocks are distributed across the worldwide network. This means that the updated version of the decentralized ledger is virtually everywhere.
Cryptocurrency holders each have a digital wallet. Users are known only by their virtual addresses or pseudonym. Come to think of it, cryptocurrency transactions are both transparent transactions and anonymous at the same time. The entire exchange is fully recorded and secure in the blockchain.
The traditional financial system first looked at cryptocurrency as a “scam” or “fad.” They thought that cryptocurrencies would remain within the boundaries of chat rooms. Cryptos seemed like one of those out-of-this-world ideas that would soon fizzle out just like the dotcom bubble burst in the 90s. Of course, events have proved them wrong. The presence of digital currencies has banks and other financial institutions looking at its impact on their business model.
Empowering the People
Banks have taken the role of intermediaries. They process and facilitate transactions between parties but at the cost of time and money. Cross border money transfers in developing countries can take days to process. People have complained of transaction fees and the need to queue. Of course, banks have fixed working hours.
Blockchain, the technology platform behind cryptocurrencies, have eliminated the need for intermediaries. Cryptocurrencies have impacted how people can do business and make transactions. A UK Banking report stated that cryptocurrencies address consumer preferences when it comes to how they transact and transfer money:
“Bitcoin users handle many of their daily payments needs themselves, removing the need to transact with banks, and avoiding bank fees. In the same way, the value stored in digital coin accounts moves outside of the bank’s payment systems, depriving banks of payment revenue,” Michael Cao’s take on the cryptocurrency issue.
The widespread use of smartphones and computers has fueled this change. Cryptocurrency apps are also empowering millions of migrant worker to send their wages to their families. Remittances, the process of money backs to a migrant’s home, amounted to $689 billion in 2018 alone. A lot of countries are heavily dependent on the remittances of their migrant citizens.
Bitcoin can be used for remittances where it is bought for the host country’s local currency, electronically transferred to the recipient’s smartphone for conversion to the local currency. The only cost would be Bitcoin’s small processing fee. A good example is Bitspark, a Hongkong-based Bitcoin remittance company. It offers remittance companies a cloud-hosting solution that works with little or no banking infrastructure. Using available Internet connection and free software/app running on a suitable device, remittance companies can send and receive a customer’s money without any additional overhead fees for installation, maintenance, and subscription charges. All the details of the transactions, including the customer’s KYC (Know Your Customer) and other anti-money laundering necessities, are stored in a secure and low-cost database, which may also be a blockchain.
The Bitspark interface features user-friendly steps to process the transaction within a few seconds. I wrote about other start-ups offering blockchain-based remittance services.
The Future of Cryptocurrency and Banks
Many banks have acknowledged that blockchain is the next big thing. Banks are waking up to the fact that they are losing some ground to cryptocurrencies. Perhaps banks have been complacent far too long. They need to look at markets and customers they have failed to serve because of their business model. Cryptocurrencies have shown that financial transactions are possible without the usual third-party intermediaries. The blockchain technology that made cryptocurrency possible can also be a game-changer for banks.