Chapter 11 Impact on the Traditional Banking System – Understanding Cryptocurrencies


Impact on the Traditional Banking System

Let us recap the difference of cryptocurrencies and traditional currencies also known as fiat currencies. Fiat currency is a legal tender whose value is backed by the government issuing it. There are about 200 fiat currencies around the world. Typical characteristics of a fiat currency are as follows:

These do not have any intrinsic value, but backed by the issuing state or government.

These can be printed or minted as needed.

The supply is not capped.

The banks have legal obligations toward customers.

A fraudulent transaction can be reversed.

No Internet connection is required to use these.

The system is an established one for centuries. (The first fiat currency is recorded to be issued in China in 1000 AD.)

Traditional banks act as a third party for the transactions and charge high fees to do so.

On the other hand, cryptocurrencies are almost opposite of fiat currencies with their typical characteristics as follows:

Cryptocurrencies are not controlled by any government.

Generally, there is a finite supply of cryptocurrency (e.g., bitcoin has a finite supply of 21 million).

The transactions are irreversible.

An Internet connection is required to use these.

It is a comparatively very new system that came into existence in 2009.

No third-party banks are required. The user pays a much smaller transaction fees than that charged by traditional banks.

Cryptocurrencies are struggling due to following reasons:

Not many merchants accept these as a media of exchange (the number is increasing on a daily basis though).

Every country has a different stand about their usage. Some have banned, some have put some limits around it, and some have not taken any stand yet!

Fraudulent transactions cannot be reversed.

Is This the End of the Traditional Banking System?

The presence of cryptocurrencies will not bring an end to the traditional banking system; however, the following factors need a good consideration so as to maintain their presence:

Governments to regulate the cryptocurrencies.

Banks to add cryptocurrencies as an additional method of payment.

Banks to reduce the transaction fees so as to compete with these.

Banks to adopt the blockchain technology to gain advantage of its inherent benefits.

Both traditional banks and cryptocurrencies to coexist for most of the world.

Can Banks Stay out of It? For How Long?

Sooner or later, the traditional banks seem to be required to adopt cryptocurrencies as an additional method of payment. Banks, like it or not, continue to dismiss cryptocurrencies due to their vested interests. The very basic principle of cryptocurrencies, especially bitcoin, is elimination of middlemen. Bitcoin claims that “It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen.” This very statement poses a threat to the traditional banks. Considering the diversity of population around world and availability of the Internet or required technology, traditional banks are going to stay here for many decades yet to come.

How Will This Affect a Common User?

Users using traditional banks for their monetary transactions will be able to take the following benefits by using cryptocurrencies:

Take control of their own transactions without paying hefty fees.

Ability to do international transactions without involving expensive middlemen.

Ability to do transactions 24/7.

Anonymous transactions, that is, without any personal information associated with the transactions.

Low transaction fees result into more savings to the user.

The transactions are permanent or irreversible, which makes it less risky to the merchants who accept these.