Will Cryptocurrency Coexist with Traditional Banks?

Many intellectuals and economists are seeing cryptocurrency as a new form of currency. However, regulatory authorities and financial institutions are completely against the stance to accept mainstream adoption of crypto, limiting it as a security or commodity.

The main concern of naysayers is that it poses a threat to conventional financial systems and in the long run it can destroy the value of physical currencies. However, there is no concrete evidence to back the argument that crypto poses a threat to traditional banks or any other financial institution. 

Nevertheless, instead of debating about who will dominate the future of the financial system between cryptocurrency and fiat, the world rather needs to strive for their sustainable coexistence. In this article, we will discuss the roadmap of how crypto’s coexistence is possible with the traditional economy without replacing it. 

Rise of Cryptocurrency

So, first, let’s have a look at the crypto’s history. 

Since the inception of Bitcoin in 2011, the world of finance has undergone a significant transformation. Cryptocurrencies have become more mainstream, and the concept of DeFi and digital assets has emerged. However, early on, Bitcoin was only intended for basic buying and selling and lacked the capability to compete with the value of the traditional banking system.

Fortunately, the emergence of the Ethereum blockchain filled this gap by providing a range of services on DeFi such as lending, borrowing, staking, and more through its smart contract functionality. In addition, users can now build their own decentralized applications (dApps) or DeFi protocols to offer new services to DeFi users, thanks to smart contracts.

The introduction of Ethereum has played a vital role in the acceleration of DeFi’s growth and has helped to increase the adoption of cryptocurrencies. Also, functionality like ERC-20 tokens also allowed others to develop new cryptocurrencies. 

However, the cryptocurrency market has been a bumpy ride in recent years, leaving many people unsure about its future. After reaching an all-time high, major cryptocurrencies have plummeted in value multiple times, leaving many investors and traders in a state of uncertainty.

Despite these challenges, the overall crypto market cap reached nearly 3 trillion in November 2021, demonstrating the continued interest in cryptocurrencies. Nevertheless, several disastrous events and bear market conditions have caused a decline in the overall crypto market. Also, some fraudulent activities have eroded the trust of many investors and traders. However, despite these, the potential of DeFi and cryptocurrencies remains immense, and many are optimistic about their future growth and adoption.

Now, let’s move on to the next.

How can Crypto replace Traditional Banking?

The idea that cryptocurrency can replace traditional banks is a topic of much debate and speculation, with proponents and critics on both sides of the argument. While cryptocurrency offers several advantages over traditional banking, such as decentralization, faster transactions, and reduced fees, several challenges must be addressed before it can fully replace traditional banks. However, here are some factors that provide a crypto edge over the fiat system.

1. Trustless Environment: Cryptocurrencies operate in a trustless environment, meaning that users do not need to trust a central authority or intermediary to facilitate transactions. Instead, transactions are verified by a network of nodes and miners, making them more secure and transparent than traditional banking.

2. Transaction Finality: Transactions in cryptocurrencies are final and irreversible once they are confirmed on the blockchain. This eliminates the need for chargebacks, which are common in traditional banking, making transactions more efficient and cost-effective.

3. Peer-to-Peer or B2B: Cryptocurrencies are designed to be peer-to-peer (P2P), which means that transactions can be made directly between two parties without the need for intermediaries such as banks or payment processors. This makes transactions faster and more efficient, as there are no intermediaries to slow down the process.

4. DeFi Services that can Replace Banking: DeFi platforms are decentralized financial services that operate on blockchain technology, providing users with services such as lending, borrowing, and trading without the need for traditional banks. These platforms are gaining popularity as they offer faster, more efficient, and more transparent financial services than traditional banks.

Here are some alternate options of traditional financial systems available in the DeFi ecosystem.

5. Authority over Funds: Cryptocurrencies give users complete authority over their funds. This means that users have full control over their cryptocurrency holdings and can use them as they see fit without the need for approval from a central authority or bank.

6. Banking Failure (Negative): While cryptocurrencies offer several advantages over traditional banking, there are also potential downsides. One of the main risks is the lack of government regulation, which can lead to increased volatility and risk. Additionally, the lack of FDIC insurance or similar protections means that users’ funds are not insured in the event of a bank failure, which can result in a complete loss of funds.

Limitation of Cryptocurrencies

Even though the concept of crypto is a decade old, it still contains some limitation that hinders its mainstream adoption.   

1. Volatility: One of the main limitations of cryptocurrencies is their volatility. Cryptocurrencies are highly speculative and their value can fluctuate rapidly, making them a risky investment. For example, the value of Bitcoin has fluctuated between $30,000 and $60,000 over the past year, which can make it difficult for investors to make informed decisions.

2. Lack of Regulation: Cryptocurrencies operate outside of traditional banking regulations, which can make them more attractive to some users. However, this lack of regulation can also lead to increased volatility and risk. Cryptocurrencies are also more susceptible to fraud and scams, as there is no central authority to monitor or regulate them.
   
   Luckily, global financial authorities like International Monetary Fund are working on it implementing crypto regulation to protect consumers. However, such regulation should be intended to protect consumers, not to kill the concept of crypto. 

3. Adoption: While cryptocurrencies have gained significant mainstream attention in recent years, they are still not widely accepted as a form of payment. This means that they cannot fully replace traditional banking until they are more widely adopted. Additionally, the lack of user-friendly interfaces and the technical complexity of cryptocurrencies can make them difficult for some users to use.

4. Security: While cryptocurrencies are generally considered to be more secure than traditional banking, there have been several high-profile cryptocurrency hacks and thefts. This demonstrates that there are still security risks to consider when using cryptocurrencies.

5. Energy Consumption: Cryptocurrency mining requires a significant amount of energy, which can have negative environmental impacts. For example, Bitcoin mining alone is estimated to consume as much energy as the entire country of Argentina. This has led to concerns about the sustainability of cryptocurrencies and their impact on the environment.

However, the history of the traditional financial system also doesn’t hold a clean slate at all. Even if we deny the history, the recent turmoil in the banking sector that wiped out three major banks, Signature Bank, Silicon Valley Bank, and Silvergate Bank, clearly indicates flaws and instability ignored for centuries. 

Also Read: Is Crypto Immune Enough to Resist Inflation?

Coexistence of Cryptocurrencies and Traditional Banks

As we all know, cryptocurrency is still in its infancy, and many experts believe that it’s still a long walk to go to get a label of legal tender. 

Cryptocurrencies and traditional banks have been coexisting for over a decade now, and despite some initial skepticism and fear, they seem to have found a way to coexist. While some believe that cryptocurrencies will completely replace traditional banks, it is unlikely to happen in the near future, primarily due to the inherent differences between the two systems.

One of the primary reasons why cryptocurrencies may not completely replace traditional banks is that the former lacks the necessary infrastructure and regulatory frameworks that the latter possesses. The sheer complexity of the financial system is one of the biggest obstacles to a world without banks, which was confirmed by DeFi experts in this Bitcoineer review. 

Banks have a long-established system for managing transactions and safeguarding assets that have taken years to build. Cryptocurrencies, on the other hand, are still in their early stages of development and are yet to gain wide-scale acceptance. The volatility of cryptocurrencies is also a concern, as their values can fluctuate wildly in short periods, making them unreliable for use as a store of value.

That being said, traditional banks are not ignoring the rise of cryptocurrencies, and many of them have started offering services related to digital currencies. For instance, several banks now offer their customers the ability to trade cryptocurrencies on their platforms. Additionally, some banks have even started offering custody services, allowing customers to store their cryptocurrency assets with them safely. This shows that banks are recognizing the potential of cryptocurrencies and are adapting to meet the changing demands of their customers.

Looking towards the future, the relationship between cryptocurrencies and traditional banks is likely to continue to evolve. One possibility is that more banks will begin offering cryptocurrency-related services as they see increased demand from their customers. Another possibility is that traditional banks could potentially become custodians for stablecoins, which are cryptocurrencies designed to maintain a stable value by being pegged to a fiat currency. This would give banks a way to participate in the cryptocurrency market while mitigating some of the risks associated with traditional cryptocurrencies.

In conclusion, while it is unlikely that cryptocurrencies will completely replace traditional banks, the two systems are finding ways to coexist. As the adoption of cryptocurrencies continues to grow, it will be interesting to see how traditional banks evolve to meet the changing needs of their customers.

Summing Up:

Following a full crypto regulation, the issue of whether a bankless future will come into existence is complicated and has potential benefits and drawbacks. While cryptocurrencies and decentralised finance provide lower transaction fees, greater security, and greater transparency, there are also worries about security, fraud, and the difficulty of moving away from the established financial system.

A more decentralised financial system may gradually shape as the financial sector develops and adapts. However, the transition to a bankless future will probably take time and effort, requiring significant financial investment and a concerted effort to create a new financial infrastructure from the ground up. So, for now, we can enjoy the duality of fiat and crypto before one overtakes the other.