Photo by Dash Cryptocurrency from Pexels
Photo by Dash Cryptocurrency from Pexels

How the Rise of Cryptocurrencies Can Transform the Financial Services Industry?

Call them Cryptocurrencies, Cryptoassets, Bitcoin or Blockchain; these are terms that are doing the rounds and have become a prominent part of conversations revolving around the financial discourse. These concepts have entered the mainstream periphery, and financial services firms can no longer ignore them. Traditional lending institutions and wealth management firms around the globe are under tremendous pressure to incorporate this asset class in their financial services marketing manuals. 

Photo by Dash Cryptocurrency from Pexels
Photo by Dash Cryptocurrency from Pexels

What is a cryptocurrency?

A cryptocurrency is a monetary unit in non-physical or virtual form. It is stored electronically within the blockchain framework, with the most well-known example being Bitcoin. So, how does it function? The virtual currency is controlled and verified – while rendering a fund transfer – using encryption methods. Note that, unlike other currencies, the supply is not determined by a banking corporation. Does that mean that the banking and financial services industry is under threat? Read along to know more.

What makes cryptocurrencies different?

Firstly, cryptocurrencies offer a duality. They are both a commodity and a currency. Additionally, users can translate or convert them into regular currency and use them to make transactions. And the best part? These are neither issued by a central bank nor are they subject to the regulations of the monetary authority. 

The cryptocurrency market today

The number of cryptocurrencies is increasing very frequently, such that questions are coming forth about the impact on the banking system. Will the financial services corporations accept the asset class as it is or create their versions? If banks are under threat, what does this mean for customers? The flummoxing issue around crypto acceptance is explored below. 

What does the cryptocurrency avenue mean for banks and customers?

The author of Value Web posits that the acceptance of cryptocurrency has grown as those who were unable to access trade and finance ten years ago can do so today. One side is that cryptocurrency will play a catalyst and help uplift the many out of poverty. It is posing itself as an alternative financing option, previously rejected by the traditional banking system. An advantage for customers is that cryptocurrency helps avoid bank fees. 

The flipside is the impact on the banking sector. Between April 2015 and 2016, over 600 bank branches within the United Kingdom had shut shop. In 2016, HSBC reported a 40 per cent reduction in the footfall (physical presence and walk-ins in the branches). The statistic does spurt up considerable concern on the landscape, and understandably so. The contention is that their rising popularity can deem physical banks obsolete.

Overall sentiment in the banking sector

When it comes to the banking system across the globe, there is a split in the reactions. Some countries and regions oppose it, whereas others look at it as a wealth of opportunity. In this light, the Head of Payments at the Reserve Bank of Australia says that digital currencies do not seem to raise any regulatory issues when viewed from the perspective of the bank’s payments policy mandate. He suggests that regulating the industry that aids it – blockchain technology – is a better move than merely regulating cryptocurrencies. However, cryptocurrency and blockchain could render potential opportunities to the banking and financial services industry.

Since cryptocurrencies are regarded as a new method of financing, many do believe that banks are under threat. But, they need not be, as suggested by the Research Analyst at BNP Paribas.

Will cryptocurrencies be the future of the modern-day banking system?

Well, this is a conundrum facing the financial sector today. As of now, there is no ultimate answer or clarity regarding this. Nonetheless, what can be said, is that banks need to step up, understand and accommodate blockchain technology. That is, there is a call for a middle-ground. With that said, a hybrid system will incorporate the creators of new cryptocurrencies, but they will need to consider and abide by the importance of traditional banking practices.

Create versus Adopt: The position of the banking corporations

Although the general reservations and scepticism still stand, six of the banking bigwigs have already put forth a consortium for creating their versions of this infamous cryptocurrency asset class. The move posits that banks shall harness the blockchain technology and have the cryptocurrencies regulated, thereby mitigating the mishaps that revolve around nefarious activities. There are already prominent names in place that have adopted digital currency. These are:

  • JP Morgan has taken two cryptocurrency exchanges, Coinbase and Gemini, under its wing, as its banking customers.
  • Fidelity Digital Assets is another venture that is turning the crypto tide by creating its crypto fund.
  • PayPal, the online payments system operator, has given the green signal for cryptocurrency transactions on its network. 

Parting Words

Despite the positive move taken by some to create their independent crypto versions, guidance and regulations for digital assets are scant. Nonetheless, the cryptocurrency space provides considerable benefits. What financial institutions need to do at this point is adopt a paradigm shift towards digital assets. For starters, viewing crypto as a partner as opposed to a competitor shall go the long mile. Also, banks already have their security and assurance measures in place. They can extend these to the largely unregulated environment of the crypto. Essentially, crypto and blockchain can help streamline the processes and take the financial sector to the next-gen innovation.