Can Cryptocurrency Replace Banks as we know them? Afterall, Cryptocurrency (Bitcoin specifically), was created as an alternative monetary system during the last Global Financial Crisis. So over a decade on, how far away are we from a world where traditional banking no longer exist?
Before we get too far into weather Cryptocurrency can replace Banks, we need to make sure we are clear on what Cryptocurrencies can really do, and, what the functions of a Bank are in the modern world.
What Is Cryptocurrency?
Cryptocurrency is a digital payment method that doesn’t rely on banks to verify transactions. Which sounds simple but it is highly revolutionary.
It is a peer-to-peer system that allows anyone to send and receive payments to anyone anywhere, and these transactions are processed by users just like you or me for almost nothing. The person who undertakes the processing of said transaction does so for a small payment of that Cryptocurrency that they are processing the payment of.
Unlike physical money that circulates and exchanges in the real world, cryptocurrency payments exist solely in digital currencies in an online database from which specific transactions are carried out. When transferring cryptocurrency funds, the transactions are recorded in a public ledger. Again, that sounds simple enough but it is a highly disruptive concept. Imagine all transactions being performed by your bank being openly published for all to see? Not really.
For the user, cryptocurrencies can be deposited in a ‘digital wallet’. This is basically software that allows you to store and access your cryptocurrency securely. In most instances wallets can be integrated with mobile payment systems which allow users to make payments using their smartphones. Understandably, this is already how many people access their money by way of applications such as Apple Pay.
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The beauty of this wallet system is that there is no way of your cryptocurrency being held hostage by anyone else, in the same way as a traditional bank does with your existing currency.
Cryptocurrency is so-called because it uses cryptography to verify transactions. This means that advanced code is used for storing and transmitting data related to the cryptocurrency between wallets and public ledgers. The purpose of encryption is to ensure safety and security and means that once it is written, it can never be altered or deleted. This approach provides an infallible record of what happened and when, which is a kind of transparency and reliability that we have never experienced from a traditional bank.
On that note, lets now turn our attention to what the background and functions of a Traditional Bank are.
What Is The History of Traditional Banking?
The inception of Banking as we know it has its roots in the Middle Ages. Arguably, the first bank on record was by the Knights Templar who, an addition to being monks and warrior soldiers further committed to the Crusades by acting as bankers to fellow crusaders and pilgrims who wanted to travel from Christendom to the Holy Land.
They would facilitate that journey of these travellers by and taking deposits from pilgrims, knights and nobles in their home country for an coded credit note, then once they had arrived at the holy land, they could then draw on their money at any Templar house from London to Jerusalem. This service meant that people didn’t have to carry the family candelabra and fistfulls of gold coins with them for the duration of the journey. A perilous trip which was months long and was scattered with bandits and robbery.
Despite the Templars falling prey to the political climate once the crusades had abated, the concept of being able to retain one’s wealth without having to have it physically on your person was born. The idea of easily transferable funds, the storage of funds and the idea of credit for a price was now firmly part of the mercantile world.
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Many merchants and traders embraced this new industry, which was initially seen as a lowly and dirty business that lacked credibility entirely. None are better known that the Medici from Florence, Italy. Over the generations, these bankers became so successful that their wealth grew exponentially, while, simultaneously, they performed a rather skilled rebranding of themselves and their undertakings. In fact, it was on no less than four occasions going as far as having a Medici brother installed at the Pope of the Roman Catholic Church, after all, What could be more legit?
They were Pope Leo X (born Giovanni de’ Medici), Pope Clement VII (born Giulio di Giuliano de’ Medici and was a first cousin of Leo X), Pope Pius IV (born Giovanni Angelo Medici) and finally Pope Leo XI (born Alessandro Ottaviano de’ Medici). You can’t make this ‘ish up.
In fact, the english word Bank is a direct use of the Italian word for Bench “banco”. This is as initially, before the legitimacy makeover, the money lending activity would take on a ‘banco’ in open air throughout the main trading places (ports and markets towns) of Europe.
The primary functions of these initial bankers were to to save and keep your money for you, and to grant loans, often with savage terms. See the Shakespearean Play The Merchant of Venice and the proverbial ‘pound of flesh’. And so it was born, the blueprint of the moden Bank which would grow into an institution whose primary functions are to perform these two functions: to keep savings on deposit; and to lend sums of money to be repaid at a later time, with a surcharge (what we now call interest).
What Are The Functions of A Modern Bank
The most basic functions of modern bank are to take deposits, in the form the savings of its clients, and as a source of credit for those clients to be able to seek a loan – such as a mortgage.
However, in addition to these two primary functions we have a vast array of auxiliary functions which serve to facilitate these two primary functions. These are things such as variety of forms of payment processing options so that the client can access their savings in the forms of checks and debit cards. Further there are a wide array of options for clients to access credit facilities such as credit cards and overdrafts.
It is widely known now that in this day and age, the Bank itself will never actually carry a sufficient amount of cash to cover all the savings of their clients or to cover all the clients’ debts. And here we are introduced to the most fundamental problem with the modern banking system that uses fiat money. Effectively, the modem banking system is writing cheques that it simply cannot cash.
Ordinarily this isn’t a problem, as there is a delicate balance performed by the banking institutions each day whereby it will ‘clear’ or fill orders of the clients’ who have requested payments to be paid. However, as the sum of the payments greatly exceeds the amount of the banknotes in circulation, when this delicate balance is disrupted, the house of cards crumbled down.
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Furthermore, people are incorrectly believe that the money they have in the bank is still their money. This is actually a misconception. Sadly, the moment you deposit your money in a Bank, it becomes the property of the Bank. It is the Banks decision as to how these funds can be used.
This means that it can us uses to invest in projects or provide it as loans or speculate in certain sectors that the Bank thinks it can make a profit in, effectively trading the markets with your life savings.
Furthermore, as was seen on numerous occasions during the last financial crisis, when the economic system is under strain and people seem to withdraw cash to retake physical ownership of their money, the Bank can inhibit you from accessing or using your own money. This is done by applying limits of withdrawals and creating hurdles in the movement of your own money.
Can Cryptocurrency Replace Banks?
There is no doubt that Cryptocurrencies are already in a position to replace traditional banks in their entirety, or at very least, relegate them to the annals of history as they exit today in their current forms. Let’s take a closer look at the variety of ways that Cryptocurrency can replace Banks due to its superiority as a system.
Trustworthiness
Despite the current high volatility of the Cryptocurrencies at this stage in their histories, there is an intrinsic transparency and therefore trustworthiness to payments made by Cryptocurrencies. Unlike traditional Banks, cryptocurrencies are not accountable to shareholders who will dump the stock of the Bank if it fails to make consistent profits. This means that the executives and management of Banks seek to make a profit for at any cost. One need look no further than the last Global Financial Crisis to see how this results.
Ease and Transparency of Payments
The main benefit of Bitcoin is its independence from financial institutions. Transactions occur directly between buyers and sellers. Anyone wishing to make an payment or transfer via the Bank, will need to go through the middleman of that Bank which means that the payment will need to be approved by a third party before it can be processed. In addition, this usually means the payment is also accompanied by paying Bank fees and currency exchange fees in case of an international transfer.
Unrestricted Access
As mentioned, in the right conditions, a Bank may restrict or limit one’s ability to access their own savings being held with that institution. Conversely, the philosophy outlined by Bitcoin and subsequently perpetuated by various other Cryptocurrencies do not have any restrictions to the user, other than having the codes or keys required to access the funds. This means that those who want to access in order to transfer or sell their Cryptocurrency can do so in matter of minutes.
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Democratic Alternative
Furthermore, Cryptocurrency is a completely democratic monetary system. Meaning, it is by the people, for the people. This means that is not regulated by any Government and cannot be altered by any Central Bank. As we have seen over many decades, Governments attempt to control an economy by the implementation of various economic policies and Central Banks intervention, usually by way of interest rates or quantitative easing. This means that you may take out a loan from a Bank with a set of terms which are then completely changed part way throughout the duration of that loan.
Similarly, Governments have also written into law the right for Banking institutions to be able to confiscate permanently the deposited funds of their clients by way of Bail In Laws. Depending on the jurisdiction, this can mean that any amount above and beyond US $200,000 can be legally taken by the Bank, that Bank made bad investment decisions with your money and needs it in order to avoid bankruptcy.
Technologically Superior
Many projects have been made using Blockchain technology, the Cryptocurrency source code, which seeks to continue their major dreams of mass adoption as a payment medium. At present, people can buy almost all things with the help of cryptocurrency stored with their personal digital wallets and not in the Bank. They can transfer it in any amount, for anyone they want and anytime, without obstacles or limits.
Access to Reliable Cryptocurrency Loans
We also have a cryptocurrency-backed loan using digital currencies as collateral, quite identical to securities-based loans. The fundamental principle works like a mortgage loan or automatic loan – you promise your Crypto assets to get a loan and pay it off gradually. You can acquire this type of loan through the exchange of Crypto or the Crypto loan platform.
While you retain ownership of the Crypto you’ve used as collateral, you lose some rights, such as the ability to trade it or use it to make transactions. Also, if the value of your digital assets drops significantly, you may end up owing back much more than you borrowed should you default on the loan.
Can Cryptocurrency Replace Banks – Final Word
There can be no doubt that Cryptocurrency can certainly replace Banks and the variety of functions currency offered by Banks. Cryptocurrencies have created an alternative financial system that resolves the problems of traditional banking and finance. This should not come as a surprise as it was the raison d’etre of the Bitcoin white paper to offer a superior financial system to the one that was failing at the time of its publishing.
in addition, the same Banking system as we are still using today has been in existence for thousands of years and has been proven time and again not to be reliable in its current state. Admittedly, prior to the Bretton Woods agreement which unpegged the value of money to physical Gold, the current system was immensely more reliable. That doesn’t mean that it didn’t fail, which it famously did during the Great Depression, but it meant that the Banking institutions were required to hold enough physical currency to honour the funds of the various creditors, which made the security of the client’s funds of any Bank significantly better.
Unfortunately, as history would indicate, it is only a matter of time until the global economy suffers another shock which some predict on this occasion will be even more immense and all encompassing than the one experienced in the last Global Financial Crisis. If this is the case, you can be assured that the astute and technologically savvy savers will desert the antiquated and opaque banking system which currency retains its hold over the economic systems of the world as a relic from a bygone era.
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Are you ready to invest in Cryptocurrency? Check out out easy to follow how to guide in How to Start Trading Cryptocurrency in 3 Steps.
As always, if you have any questions, we would love to hear from you in the comments box below. Happy trading!
