Blockchain technology has the potential to revolutionize the banking system thanks to the fact it runs on safer technology compared to traditional banking.
Furthermore, the power of blockchain hides in its accessibility. If we know that 60% of the population doesn’t have a bank account, we can easily see how blockchain technology might be more convenient for them. A large number of these unbanked people have a cell phone, which allows them to access their digital wallets needed for transactions on the blockchain.
So, are we likely to see crypto banks become mainstream anytime soon? Let’s find out.
Blockchain Is Less Flawed Compared to Traditional Banking
It’s important to remember why cryptocurrencies were developed in the first place - because of a deeply flawed banking system. Back in 2007, we experienced an economic decline which clearly showed we suffered from poor central bank management.
Bitcoin was invented as an alternative to fiat currencies. Its main strength lies in the fact it’s decentralized, independent from governments and central financial institutions, and eliminates the need for an intermediary when completing transactions. Over the years, blockchain technology advanced to offer novel capabilities such as smart contracts. However, scalability issues and cryptocurrencies’ notorious volatility still impede the process of wider adoption of crypto in the financial world.
Are Banks Now “Flirting” With Crypto?
Roughly a decade ago, the executives from Wall Street’s biggest banks tried to fight the legitimization of Bitcoin because they were frightened that the use of crypto could potentially threaten the survival of the financial sector as we know it.
Today we can confidently say that those efforts failed. There are now more than 106 million Bitcoin users and cryptocurrencies have become a reality that banks - and everybody else - have to reckon with.
Banks have responded to the challenge by trying to catch up with blockchain technology. They started experimenting with crypto and lobbying the regulators to draft laws that would work to their advantage. Some banks are now offering crypto investments to their wealthier clients. JPMorgan even started its own cryptocurrency in 2019!
Another tell-tale sign of where the industry is headed is the fact that in 2021, Bank of America almost broke the record of patent applications in its history with 227 AI- and blockchain-related patents. We still don’t know how BofA will use this abundance of patents, but one thing is clear: It’ll try to retain its customers and keep them away from cryptocurrency startups.
Other banks are also working on implementing crypto. Bank of New York Mellon and Northern Trust are now offering custodial services to their clients that would hold Bitcoin. And the list goes on.
How Can the Banking Sector Use Blockchain Technology?
There are several ways the banking sector can employ blockchain technology, including:
- For payments: The most obvious use of blockchain technology in banking is incorporating it into the payment system. These transactions are safe and anonymous and their cost is minimal, especially in comparison with wire companies such as Western Union or Wise. Considering these benefits, we can expect banks and fintech companies to switch to this method of dealing with payments at some point.
- To reduce costs: Blockchain can significantly reduce the cost of banking services and improve their quality. Since blockchain technology is secure, transparent, and easily manageable, it can be used to streamline some common banking activities, such as payments and issuing loans, which will decrease costs both for banks and their clients.
- To reduce human error and risk of fraud: Human errors in accounting, record-keeping, and reconciliation are more common than you might think. Security can also be endangered due to human error. Blockchain, on the other hand, automatically records transactions that can’t be altered later. Should banks choose to use this technology, they’d be able to automate many manual processes, reduce human error, and improve their efficiency and overall security.
- To facilitate seamless onboarding for less experienced investors: Banks could leverage their expertise and reputation by helping novice investors tap into the crypto market by assisting them with storing and investing their cryptocurrency.
Do Banks Need To Worry About Crypto?
One of the reasons blockchain is so convenient is that it allows people to complete transactions without the need for an intermediary. This directly affects banks, which traditionally serve as intermediaries.
However, we shouldn’t underestimate the capacity of banks to adapt to new market conditions and the influence they can exert on regulating bodies. Finally, the more regulated the crypto market gets, the more similar to the traditional financial system it becomes - and that’s something banks know a lot about.
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2022-05-06 23:21:19
