As more and more online companies begin to accept cryptocurrency as a form of payment, it has both lawmakers and financial institution regulators feeling nervous. The frequent introduction of cryptocurrencies has many people wondering what the impact will be on banks and the financial industry as a whole. Will banks be forced to adapt their systems? If banks are affected, what impact will their customers face? These are some of the questions we aim to cover in this article.
What Is Cryptocurrency?
, also known as crypto, is a digital currency with no physical form. Cryptocurrencies can be considered virtual tokens that have value determined by the market forces that are created by people who purchase or sell them. Rather than relying on government guarantees, a technology called blockchain oversees the operation of cryptocurrencies. Cryptography is used to control and verify transactions, and to control how and when new units of crypto are created.
Cryptocurrency is different from flat currencies such as the British pound or the U.S. dollar, as they are not issued by any central authority, nor is supply determined by banks. They can be obtained through a process called mining, which involves using high-power computers to solve cryptographic problems. People can also purchase them through brokers, then store and spend the crypto using encrypted wallets.
History of Cryptocurrency
To get a better understanding of the impact cryptocurrency could potentially have on the financial industry, it’s important to take a quick look at its history. This timeline shows just how popular crypto is becoming, and how quickly it’s gaining that popularity.
- 2008 — Creation of Bitcoin
- 2009 — First Bitcoin transaction occurs
- 2011 — Other cryptocurrencies created, including Litecoin, Swiftcoin, and Namecoin
- 2013 — Creation of Primecoin, Dogecoin, Emercoin, and Gridcoin
- 2014 — Creation of DigitalNote, Auroracoin, Vertcoin, and many others
- 2015 — Creation of SixEleven, Ethereum, and IOTA
- 2016 — Creation of Zcash and Platform
- 2016 — Number of Bitcoin ATMs rises from roughly 500 in January to around 900 by end of year
- 2017 — Creation of BitConnect, Bitcoin Cash, and Ubiq
- 2021 — Tesla buys Bitcoin
What Does Cryptocurrency Mean for Banks and the Financial Industry?
Cryptocurrency has the potential for both good and bad in the financial industry. People who were once unable to access finance and trade opportunities can now do so with the use of cryptocurrency. It can also be translated into regular currency at any time for regular transactions, even though it is not issued by a bank, nor is it subject to a central financial authority.
All information is stored in the cloud and is not controlled by any government or financial institution, therefore there is no intermediary to ensure secure transactions. The lack of regulation could potentially foster an atmosphere that is prime for money laundering and other illegal and untraceable activities.
Cryptocurrency Concerns
Many banks are feeling threatened by the implementation of cryptocurrency. Banks that rely on revenue from transaction fees are the most likely to be impacted. Cryptocurrencies allow for transactions without an intermediary, meaning people will no longer have to interact the same way with banks as they do now. This makes transferring funds a much quicker process without any transaction fees. Banks will need to consider how they can take advantage of cryptocurrency and the technology behind it. If banks fail to do this, they face the possibility of becoming outdated and unusable.
Benefits of Cryptocurrency
While there are reasons for banks to worry about cryptocurrency, there are also some things that banks and the financial industry could potentially look forward to and take advantage of. The OCC announced that national banks can now use stablecoins and public blockchains for transactions. This gives banks the opportunity to process transactions more efficiently, without needing a third-party organization. Blockchain technology can provide a less expensive and faster substitute for clearing houses while processing transactions. Utilizing blockchain technology could make the clearing and settlements process occur much quicker.
Banks could provide interest-bearing cryptocurrency accounts that allow customers to invest the cryptocurrency through designated financial tools. They can act as a trusted third party to relieve stress for investors that aren’t experts in the details of crypto. Banks could also protect investors’ assets and provide cryptocurrency security against theft or hacks — putting customers’ minds at ease. Ultimately, putting crypto under bank supervision could potentially prevent criminal activity.
The Bottom Line
The adoption of cryptocurrency will affect banks and the financial industry as a whole, but as of right now, there is no telling whether the goodwill outweighs the bad, and vice versa. The best thing that banks and other financial institutions can do is to stay educated and up to date on cryptocurrency to decide what will be best for their institution.
At BMA, we pride ourselves on our extensive knowledge of the financial banking industry. We help all kinds of financial institutions make the most of the services they provide. Contact BMA today to learn more about how we can help better your financial institution.
