Last updated on February 19th, 2022 at 09:03 pm
The rise of blockchain technology has been met with different reactions across the world, most especially from Central Banks of different jurisdictions. Most of them are not comfortable with how cryptocurrency is disrupting the banking industry. Do banks have roles to play in the crypto-financial sector?
Already, leading cryptocurrencies such as bitcoin and ethereum, have been affecting how the banking system is engaged in different places in the world.
Blockchain which powers the idea behind cryptocurrency enables anyone from anywhere to send and receive digital coins, without having to encounter the stringent hurdles placed by banks in the traditional banking system.
Cryptocurrency vs Banking Sector
Some central banks still dislike the operations of cryptocurrencies and are still insisting on fighting this technology in their territories, thereby placing bans on cryptocurrency.
Nigeria’s apex bank, for instance, warned financial institutions in the country to stop processing crypto-related transactions and instructed them to block account numbers involved in the crypto deal.
While some countries are taking an anti-crypto policy to discourage users, others are adapting to new normal. They do this by coming up with regulations instead.
So, why are some banks afraid of bitcoin, ethereum and over 9,000 coins that exist today?
Break of Banking Monopoly
Before the rise of cryptocurrencies, individuals had no alternative. They relied heavily rely on traditional banking (or other financial institutions) before they can send or receive money, as well as engage in other financing services. Things have changed now.
Currently, there are tons of fintech companies offering smart services to users all around the world, with peer to peer platforms that allow you to engage in financial activities in real-time, without the numerous hurdles in the traditional banking system.
Trade Made Simple
By utilizing crypto potentials, it’s now easier to trade, make a payment, invest in crypto assets and engage in other financial transactions without encountering traditional restrictions.
One of the prominent sources of revenue for traditional financial institutions like banks, have been through the costs of transactions, realized as customers engage their financial services.
But consumers are now aware that transaction costs in several blockchains are cheaper. This is one of the major reasons banks see cryptocurrency as a threat to their existence.
Impact of Volatility
What happens if a crypto investor loses its crypto investment deposits at the conventional banking will be affected. Additionally, many banks are cautious of crypto not just due to its decentralized nature, but also its volatility as well as KYC concerns
Hence, governments of many countries still think the technology is a threat to traditional banking, and they have been taking proactive steps to curb its potentials.
The Chinese government keeps banning crypto activities, while the banks in a country like Nigeria are officially prohibited from supporting cryptocurrency transactions carried out by their customers.
It should also be added that several central banks resisting cryptocurrency can now boast of their central bank digital coins – which are still not as widely embraced as crypto.
Removal of Intermediaries
Blockchain technology has enabled investors to do their stuff without battling with intermediaries synonymous with the banking industry. They can thus explore financial opportunities with freedom.
The traditional banking industry can be positively affected by crypto operations by upgrading its efficiency as far as crucial financial services and transactions are concerned.
These include financial payments, loans, securities, fundraising, credit system, customer KYC, and so on.
There are several obvious things that banks can do with cryptocurrency with the right attitude, and they only have to up their game to enable them to compete with the innovations associated with blockchain technology.
Roles Financial Institutions Play in the Cryptocurrency Industry
Already, certain top traditional financial institutions have embraced crypto and Defi. A famous example is Goldman Sachs. So, it is a wise thing if banks take innovative steps to get actively involved in this technology.
The idea behind the development of Ripple was to enable the banking sector to explore its blockchain technology to provide banking services in a faster and most efficient way.
Financial institutions can adopt crypto and get enabled to enhance their financial services. Rather than deciding to focus on assumed risks, they will do well concentrating on its beneficial potentials.
Current industry advancements should naturally make the benefits of crypto much obvious to traditional bankers. Before the end of 2021, a Senior Economist at the International Monetary Fund (IMF) stated that no single country can control cryptocurrency.
“There are challenges to banning it whether you can end up with truly banning crypto because many exchanges are offshore and they are not subject to regulations of a particular country,” Gita Gopinath said.
Let’s explore prominent obvious ways banks can get involved in the crypto world:
Easy Onboarding And Expert Assistance
Already, traditional banks have this expert reputation as far as the financial sector is concerned, and they could ride on this to be frontiers in the cryptocurrency industry.
This way, they can be of great assistance to naive investors who want to make an entry into the crypto world. This can be easily done as they develop tools that can be used to ensure the adoption of cryptocurrency by their customers.
CEX.IO which is regulated in the United Kingdom is already providing services that enable its users to safely invest in bitcoins, ethereum and other coins by funding their crypto wallet by using their credit cards.
As stated earlier, banks already have a reputation in financial affairs and can be easily trusted by their customers along this path.
It’s cool, for instance, when banks offer special cryptocurrency accounts to their customers, which can generate interest to users.
Bank users will easily trust the financial tools created by these financial institutions to make this a reality.
Even some big blockchain technology users aren’t too comfortable with the liberty of several other people to transact crypto faceless and nameless.
With growth and improvement in the technology, AML and KYC verifications could be automated, and a single blockchain can store all customer data – which banks can utilize too.
Also, there are legislations in place that promotes KYC in the cryptocurrency industry, which will help avoid malicious transactions and scams.
It means banks can conduct due diligence on their users involved in crypto operations, reducing their worries about the risks attached to these transactions.
Boosting Banking Security
Another effective way banks can get involved in cryptocurrency is by removing the security threat that surrounds virtual coins.
Many crypto holders are worried about the security of their assets, particularly with different news of hackers gaining entry into people’s wallets and emptying their thing.
Thus, banks can present innovative solutions that could help cryptocurrency holders secure their assets.
Banks too can take advantage of blockchain technology to speed up their payment processes. This should be paramount on the agenda of an average innovative bank not scared of transformation.
Today, there are stablecoins out there that can be utilized, and they will see how customers will appreciate their fast and cheaper operations.
Banks could get directly involved as they offer cryptocurrency custody services for interested users.
They can develop easy tools to hold unique cryptographic keys used to access private wallets. Financial institutions can hold crypto for their customers, and they will be gladly paid for the service when appropriate.
On the other hand, it is understandable why several banks are wary of cryptocurrency. We know excess freedom can be abused. We also know that the issues surrounding security and stability are making many avoid looking towards this direction.
Nevertheless, rather than being rigid with anti-crypto policies, banks can focus on the potential benefits.
The fact remains that, there will always be the bad guys using technology for bad things – and cryptocurrency isn’t an exemption.
Banks should be innovative and stop depriving themselves of the several benefits attached to the adoption of blockchain technology.
Cryptocurrency is not an enemy of banks, but a profitable partnership could be established, which will ensure effectiveness and efficiency.
Banks should realise that cryptocurrency has come to stay, central banks and other regulatory authorities should look beyond the hazards of crypto assets.
- By Unsplash