As we enter an exciting new paradigm of finance and technology, many traditional institutions are struggling to keep up with the blockchain revolution. What once seemed like a pipe dream - providing financial services to the masses without the need for traditional banks - is now becoming a highly debated topic. As cryptocurrencies, blockchain technology and decentralized finance become increasingly popular, a seemingly radical question emerges: can crypto kill the banks?
If you have been following the Ivan on Tech Academy blog for a while, you will know by now that traditional banks are in a bit of trouble. With multiple bailouts and unprecedented levels of stimulus, the global economy is about to undergo an important change as we move into the digital era. Moreover, blockchain technology could kickstart a paradigm shift in financial services, which threatens to render traditional banks irrelevant.
In this article, we’ll discuss the role of blockchain and cryptocurrency in the fast-changing landscape of payment technologies, and explore how the legacy financial system must adapt to stay relevant.
Those interested in this potential blockchain-driven paradigm shift in the finance sector should take a look at the rest of the content available on Ivan on Tech Academy. If you enroll today, you will get 20% off with the exclusive discount code BLOG20. Once enrolled, you can enjoy top-notch blockchain courses explaining everything from the history of money to cryptocurrency basics.
As you may know, Bitcoin was the first cryptocurrency to be created using blockchain technology, way back in 2009. Since then, thousands of other cryptocurrencies and “altcoins” have been created.
There are different types of cryptocurrencies serving many different purposes. For example, there are stablecoins, exchange coins, DeFi coins, native tokens, and non-fungible tokens. It’s worth noting some coins are created just for fun and have no intrinsic value.
Blockchain technology is like a smart online database, that is an open-source, transparent, ledger of transactions of every single cryptocurrency, that is viewable to the public.
Opposed to a governing or central party managing this database, it is scientifically and mathematically verified by thousands of computers called nodes, in a network around the globe.
A transaction is verified by a node and then placed into a block. When the block of verified transactions is full, it is appended to the blockchain where all data becomes immutable.
Blockchain technology has successfully removed trust from financial transactions, and unnecessary third-party intermediaries such as brokers, real estate agents, and banks?
Crypto debit cards are one of the hottest trends this year, with Binance Card recently going live in Europe, just the latest in a string of Visa crypto debit cards now available, making it easier than ever to use crypto to pay for goods and services.
Many crypto debit cards offer handsome rewards, with different tiers available to suit different financial situations. Most crypto-backed Visa debit cards offer in-app staking rewards, cash-back, and other perks for holding the platform's native token.
Though these tasty offers may not be around forever, there appear to be new enticing offers almost daily from Visa backed crypto debit cards. By integrating with traditional payments giants such as Visa, cryptocurrency edges closer to mass adoption with perks unmatched by any bank.
Visa has allowed users to spend their crypto at over 54 million merchants worldwide, and recently detailed plans to further bridge the gap between cryptocurrencies and global payments by bringing interoperability to global payments and everyday transactions.
During times of economic uncertainty, borrowing money can be extremely difficult. Since the stock market crash in March, emergency monetary and fiscal measures have been implemented by governments and central banks in an attempt to limit the risk posed by the pandemic.
The reality of this situation is that everyday people who need credit can’t get access to it as easily as they once could. Big businesses are incentivized to borrow money they might not need but often do it anyway as it can be done so at a very low-interest rate.
Meanwhile, the collateral needed for individuals and small businesses to get a mortgage is rising in many parts of the world, where often only the very best credit scores are considered safe for lenders due to mass unemployment.
Decentralized finance platforms are changing the game by providing lending and borrowing services on the blockchain. In many cases, users can lock up crypto assets as collateral to take out a crypto loan, while earning free tokens in the process just for using the platform.
In times of recession and economic downturn, getting access to credit can be a struggle, and often comes with high interest. People can’t afford to take the risk of borrowers defaulting at this time, so credit dries up (unless you happen to be a zombie company that is “too big to fail”).
DeFi is, by its very nature, open to anyone with an internet connection, in any geography. A farmer in India has the same access to the same financial instruments as a high-flying wall street businessman, meaning that opportunities are not restricted to only the wealthiest in society and everyone has a better shot at climbing the socio-economic ladder.
If you want to learn more about DeFi, or decentralized finance, Ivan on Tech Academy is just a click away, with its many blockchain courses. Join over 20,000 existing students on a proven online education platform!
According to a report by The World Bank Group, nearly a quarter of the global population remains unbanked. Of this collective, nearly two-thirds have access to a smartphone and the internet, meaning there is an opportunity for people to use alternative crypto financial instruments.
Also, there are people in high-income countries that have access to a bank account but don’t have adequate access to the financial services that banks can offer, including saving and credit. These people are known as underbanked. In 2018 just over 25% of citizens in America were reported unbanked or underbanked.
The blockchain can allow people to create a digital identity, and transact in an array of financial tools at their fingertips; people who otherwise, may not have access to banking facilities due to identification document issues.
Furthermore, issues around property rights can be restored with housing ownership registered on the blockchain.
Bank of England Deputy Governor Sir Jon Cunliffe recently voiced concerns that cryptocurrency economies could see the end of traditional bank lending as we know it, stating that Facebook’s Libra could result in “profound economic consequences”.
If successful, Libra could be a significant threat to traditional banking as the potential network effect is bigger than that of any other payment system or cryptocurrency project, as there are currently over 2 and a half billion users of the social media platform. However, one should also note that Libra is facing issues of its own.
Bypassing commercial banks and removing intermediaries for transactional purposes could leave commercial banks completely redundant. If banks continue to be a liability for wealth creation and preservation, then they must change their business model or risk fading into obscurity.
To some Bitcoin OGs, the idea of being your own bank is the ultimate goal of cryptocurrency. The maximalist viewpoint often sees cryptocurrency adoption as a zero-sum game, meaning that the success of crypto relies on the decline of traditional finance.
The reality is though, the mass adoption of cryptocurrency is likely to be achieved by the integration of the blockchain into the legacy financial system, and interoperability between crypto services and banking services.
Many people don’t want the responsibility of being their own bank, and that is understandable. Although a fundamental understanding of how blockchain technology works is an advantage to investors, it doesn’t always need to be a requirement. People can gain exposure to digital assets in a variety of novel ways, often without the need to physically own cryptocurrency or use private keys.
Binance, for example, allows users to trade hundreds of cryptocurrencies without the need to have full custody of your assets by holding private keys.
With the introduction of Binance Card following the recent acquisition of payments firm Swipe, Binance users will also be able to convert digital assets to fiat at the point-of-sale to pay for goods and services. Combined with in-app staking, rewards, and a host of new features coming to the platform, Binance is already competing with banks by offering an unmatched financial service.
Though some may rejoice at the sight of the Bitcoin adverts sprawled across the public transport of Tokyo, the fact of the matter is that one does not have to be their own bank to be in crypto, and there are many different cryptocurrency services on offer that combine the speculative appeal of cryptocurrency, with products and services which are almost indistinguishable from modern financial applications from a user experience perspective.
Derivatives are financial instruments that represent an asset, allowing people to trade assets without physically holding them. Derivatives are securities that derive their value from other assets. Common derivatives in traditional finance include futures, swaps, and options.
For example, many people like to trade gold. However, storing large amounts of gold can be troublesome, and making short term-trades with physical gold would be highly impractical. Synthetics could follow the price of a commodity without requiring the trader to take into account transport, storage, or security.
Decentralized derivatives platforms such as Synthetix allow users to mint and trade synthetic assets on Ethereum while betting on the price of real-world assets using ERC-20 tokens.
By locking up Synthetix Network Tokens (SNX), users can earn rewards and fees from the Synthetix network, and create synthetic assets such as sUSD, or sETH, pegged to USD ETH respectively.
Though crypto-synths are still relatively new, the Synthetix platform alone reached over $900 million in total value locked in what has been a parabolic month for DeFi. So, can crypto kill the banks? Well, it doesn’t seem too unrealistic in the long run!
Given the diverse opportunities proposed by this side of decentralized finance, cryptocurrency could completely outdo traditional derivatives markets by lowering the barrier for participation to allow anyone, anywhere to use these financial instruments.
Fundamentally, if banks lose the trust of the people, they are doomed to fail. The willingness of governments to bail out banks that are operating carelessly beyond their means has resulted in the taxpayer footing the bill for other’s recklessness.
Meanwhile, during the economic disasters over recent years, the very people responsible for gambling the life savings of regular citizens, are paid handsomely for their disregard of the money they are supposed to protect.
If distrust towards banks becomes too strong, a bank run could see savers rushing to withdraw their savings all at once, which of course would not be available due to fractional reserve banking. The result would be an economic catastrophe, as was seen in the US banking panics of 1930-31.
When banks are in trouble, it is not uncommon for capital controls to be enforced. In 1933, Franklin D. Roosevelt issued Executive Order 6102, making it illegal for US citizens to own gold, the punishment for which was up to ten years in prison. The order required that all gold (except for some exceptions such as dentists) would be sold to the Federal Reserve in exchange for $20.67 per troy ounce.
Franklin D Roosevelt
What was supposed to be an attempt to stabilize the US economy, unfortunately, led to a crash in 1935, with the stock market dropping by 90 percent and record unemployment following.
In 1971 President Nixon did away with the gold-standard, removing the dollar’s peg with gold and allowing it to float freely on the market against other currencies. The gold that had been stockpiled by the federal reserve for years was then made available once again but at the increased price of $32 per ounce.
So, can crypto kill the banks? Well, it’s possible. The likelihood, however, is that cryptocurrency projects will continue to collaborate, inspire, and interoperate with the traditional financial system.
Never before have there been so many ways to transact with cryptocurrency. Blockchain has become a key part of financial services and an essential component for industry-wide infrastructure.
With the rise of blockchain in enterprise and a wave of new developments in the digital payments space, cryptocurrency is at the forefront of modern financial services, offering more than banks ever could. Of course, at the start of a bull run, it’s easy to speculate and spread hopium, but the amount of development going on in cryptocurrency puts the industry light years ahead of the legacy financial system.
Major banks and financial institutions are already involved with blockchain, many of whom have changed their stance on cryptocurrency having previously dismissed or mocked it.
Paypal, Visa, Mastercard… it’s already happening. Soon enough, cryptocurrency will likely be a part of everyday life, seamlessly integrating with banking apps and financial services, whilst setting the tempo for innovation and technological advancements.
If you want to take part in the blockchain revolution, or at the very least understand why traditional financial service providers are going to have a hard time in the coming decade, we highly encourage you to enroll in Ivan on Tech Academy. Ivan on Tech Academy is rapidly becoming one of the top names in blockchain education, and consistently produces real-life success stories. Check it out today!
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