The Banks are Cozying up to Crypto
The bank’s narrative towards crypto has dramatically shifted – from negative to positive for the most part, but tension remains.
From the start, it’s always been a weird, passive-aggressive relationship. Crypto was designed specifically to bypass the necessity of banks and financial oversight. To counter this, banks regarded crypto as a fad, then as a platform for illicit activity, and more recently, as a direct threat to their supremacy in handling financial transactions.
But it seems banking institutions have been taking notes.
J.P. Morgan CEO Jamie Dimon in August 2018 called cryptocurrency a “scam” and said he had “no interest.” Within 6 months, J.P. Morgan announced their own crypto digital coin called JPMCoin which will be used to instantaneously transfer payments between institutional accounts.
The issues with Banks
Banks have two important economic functions. First, they operate a payments system, and a modern economy cannot function well without an efficient payments system. The second function is financial intermediation – lending or investing the money we deposit with them or credit they themselves create to business enterprises, households, and governments.
They remain the trusted guardian of individual, corporate, national and international entities, but since the 2007-2009 financial crash and bailout – the trust of the American people has dwindled.
An alternative is something people are searching for and crypto provides that.
Accountability
There are countless cases of insider trading, corrupt bankers, irresponsible financial investments and criminal activity connected with high-ranking banking officials. Accountability was the main reason for the financial crisis, eventual crash, and bailout in 2007-2009.
Only one top banker went to jail the rest received a slap on the wrist and fines. But millions of Americans went bankrupt, lost homes, jobs and their retirement.
Integrations
Everything is digital now which has increased the need for interoperability and integration of digital services between institutions.
As discussed earlier, J.P Morgan is trying to solve this with their own crypto digital coin called JPMCoin. But a majority of banks rely on 3rd party solutions to integrate their services which highlights security and infrastructure concerns.
Homogeneous
Banking institutions all perform the same primary functions.
This has caused financial institutions to become increasingly concentrated and homogeneous. For customers, there is little incentive to shop around and instead, rely on questionable third parties.
Innovation
Financial technology, or Fintech:
is used to describe new tech that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.
Systems like SWIFT, which has been around for 46 years, hasn’t evolved to meet the demand of consumers. They haven’t felt the need, until blockchain technology was introduced, to enhance their services – speed, efficiency, and cost.
The benefits of Crypto
Crypto has emerged as a digital alternative to more traditional methods of exchange like cash or credit cards.
On the one hand, there’s the school of thought which sees cryptocurrencies as a financial medium for fraudsters, terrorists, and criminals – especially given their involvement in ransomware scams, and dark web transactions.
On the other hand, the value of cryptocurrencies has made them a viable investment which – with the positive hype surrounding its utility or use case – a positive impact on the wallets and trading practices of mainstream investors, worldwide.
Decentralization
With centralization (i.e. banks, government), there are several crucial disadvantages stemming from the fact that any central authority also plays the role of a single point of failure in the system: any malfunction at the top of the hierarchy, whether unintentional or deliberate, inevitably has a negative effect on the entire system.
Decentralization removes the need for powerful central authorities and instead hands control back to the individual user.
The decentralized dream is about society going to the next level – where layers of middlemen – are now gone. These middlemen tell us what to do, tell us what to think and charge us for the privilege as they gatekeep the ripest intersections of world economies.
Just like the internet broke the information stranglehold, crypto and blockchain technology will break many economic choke points.
Immutability
For merchants, this is a godsend.
Cryptocurrency transactions cannot be reversed, unlike electronic fiat transactions.
This is because there is no central “adjudicator” that can say “ok, return the money.” If a transaction is recorded on the network, it is impossible to modify.
While this may disquiet some, it does mean that any transaction on the various crypto networks cannot be tampered with.
Like Libra, Facebook’s cryptocurrency, which will let you buy things or send money to people with nearly zero fees.
You’ll pseudonymously buy or cash out your Libra online or at local exchange points like grocery stores, and spend it using interoperable third-party wallet apps or Facebook’s own Calibra wallet that will be built into WhatsApp, Messenger and its own app.
Fixed supply
Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply.
Central banks can issue as many as they want and can attempt to manipulate a currency’s value relative to others. Holders of the currency (and especially citizens with little alternative) bear the cost.
Think inflation! The more money issued, the less it is worth.
The supply of crypto is controlled by the underlying algorithm. A small number of new crypto trickles out every hour and will continue to do so at a diminishing rate until a maximum, which has been preset, has been reached.
This makes crypto more attractive as an asset – in theory, if demand grows and the supply remains the same, the value will increase.
Removing Borders
Borderless transaction settlement, or remittance. As in, transacting between two countries with different currencies. Seamlessly, fast and cheap.
Just the other day, Ripple agreed to enter into a strategic partnership with MoneyGram (NASDAQ: MGI), one of the world’s largest money transfer companies.
The partnership with Ripple will focus on the xRapid product, a solution for on-demand liquidity, which reduces reliance on pre-funding by enabling money to be sent from one currency and instantly settled in the destination currency. It leverages XRP, the native digital asset of the XRP Ledger, as a real-time bridge between the sending and receiving currencies. XRP remains the most efficient digital asset for settlement with transaction fees at just fractions of a penny, compared to other digital asset fees of about $30 per transaction. Similarly, the average transaction time for XRP is two to three seconds with other top digital assets ranging from 15 minutes to an hour.
Currently, the most popular ways to send money internationally are through Western Union and Moneygram because they do not require a bank account. However, the downside is that using these methods comes at a steep cost due to additional fees.
Ripple solves that problem by using XRP, Ripple’s digital currency, which offers banks and payment providers a reliable, on-demand option to source liquidity for cross-border payments that is much cheaper.
With these savings, platforms are able to pass the savings along to the consumer. Service platform BeeTech Global, based in Brazil, was able to reduce their fees by 80% to consumers using RippleNet.
Pseudonymity
While senders of traditional electronic payments are identified to comply with anti-money laundering and other legislation. Users of crypto, in theory, operate in semi-anonymity.
Since there is no central “validator,” users do not need to identify themselves when sending crypto to another use.
When a transaction request is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary crypto as well as the authority to send them. The system does not need to know his or her identity.
In practice, each user is identified by the address of his or her wallet. Transactions can, with some effort, be tracked this way. Also, law enforcement agencies have developed methods to identify users if necessary.
Furthermore, exchanges are required by law to perform identity checks on their customers before they are allowed to buy or sell bitcoin. This has facilitated another way that crypto usage can be tracked.
Since the network is transparent, the progress of a particular transaction is visible to all.
This makes crypto not an ideal currency for criminals, terrorists or money-launderers. Even though the media has made it out to be the currency of the black market. Cash still reigns.
Conclusion
Banks have started cozying up to crypto, but are still wary of its potential. The success of PayPal and Venmo have demonstrated users are searching for alternatives – even if they are not cheap.
Crypto is extensive and major financial, business and government institutions have not only noticed but are actively participating.
Why?
Crypto is innovative – breaking down borders and is decentralized. Crypto was designed specifically to bypass the necessity of banks and financial oversight.
Banks and financial institutions are forced to embrace crypto and blockchain technology – or become irrelevant.