Will Cryptocurrency Be the End of Traditional Financial Institutions?
Cryptocurrency is being promoted by some folks as the money of the future. These individuals believe that cryptos will become the default medium of financial exchange in the nearest future, rendering banks and current financial institutions obsolete.
But is this true though? Isn’t it possible that these individuals are overly optimistic about this new technology? Granted cryptocurrencies are potentially capable of disrupting wide swaths of sectors.
As you well know, there’s often a huge difference between potential and its realization. We’re still a long way from reaching the full potential of cryptos. Blockchain is still in its infancy, and it will take a bit of time before we get there.
In the meantime, if you’d like to know what cryptos can and cannot do right now, this article will show you all that. We’ll be looking at the importance of banks, their problems, the solutions that cryptos can and can’t provide, and a final word on the place of banks in the present and future.
Why are Banks Important and Popular?
In spite of the growing dissatisfaction with banks and other financial entities, the reality is there’s really no other system that works as well as they do. Financial institutions have been hundreds of years in the making.
While technology is known for its ability to accelerate the rate of development worldwide, it will still take a while to develop a tech that can completely take over the functions of traditional financial institutions and banks. This is because they do the following:
Store Funds, Assets and Important Documents
Stashing your money in the house is a well-known security risk. Burglars and armed robbers are more likely to break into one’s home and steal your hard earned money. Banks reduce this risk by providing depositors with the infrastructure necessary for depositing their cash and securing it.
In fact, banks have measures in place that ensures that depositors don’t lose their monies in the event of the bank filing for bankruptcy and closing up shop. This is known as depositors insurance. Therefore, depositors are able to secure their funds, important documents, and even personal belongings like jewelry.
Aids Record Keeping and Manages Transaction Details
Trying to manage your expenses manually can be very tasking. With more people working 2-3 jobs and having little or no time for much else, the extra burden of tracking their finances manually will overwhelm them.
Thankfully, banks provide an avenue for you to track every debit and credit. Every expense, savings, and income is tracked and recorded through a network of fully established and integrated financial entities.
May Provide Financing, Credit Facilities and Mortgage
Banks provide their customers with credit facilities, thus allowing the opportunity to borrow funds in emergencies. They can also cover some of your expenses upfront and then bill you on a monthly basis –with interest of course.
So, whatever you need to buy, as long as you’re credit worthy, they can help you get it. So, you can borrow, enjoy mortgage facilities, take a credit card, and even get car financing all thanks to banks.
Even more, traditional financial institutions like the credit bureau provide a credit rating system that helps the banks, insurance companies and a host of other agencies decide if you’re a low risk or high risk customer.
While this can be both good and bad, depending on the individual’s situation, the fact is only the current traditional financial institutions are capable of providing such facilities.
Provides Easy Access to Cash and Currency Exchange
All banks everywhere in the world are part of a network. This network in conjunction with global financial standards and economic indices determine how much each country’s currencies are worth and assigns them the correct value.
As a result of this network, currency exchange is highly possible, as well as access to cash wherever you are in the world through ATMs and other fintech solutions.
Controls Inflation Rates
Without the interference of banks, the global financial system would be chaotic. Inflation rates would go through the roof.
Banks bring stability and regulation to global markets and finance by regulating interest rates and controlling inflation through a series of complex interventions. They also control the amount money that’s in circulation at every point in time.
Why are People Unsatisfied With Traditional Banking
In spite of these seemingly great features, why are people unsatisfied with banks? Well, the answer is simple: conventional banking services are lacking in so many areas, resulting in growing discontent among its customers. Some of the reasons people don’t like banks include:
Costs of Transactions
Sometimes, transaction costs can be pretty outrageous. Not just that, there’s often maintenance fees, overdraft fees, transfer fees, ATM charges and so much more. By the time you look at your statement and tally these numbers, it adds up.
It is not unusual for customers to pay thousands of dollars a year in bank fees. This is why many are advocating for the increased adoption of cryptocurrencies. While some of these charge transaction fees, they are nowhere near what banks charge.
For instance, a $99 million transfer on the Litecoin network attracted a mere $0.40 charge. An equivalent transfer in banks would set you back almost a $1 million.
Red Tape and Bureaucracy
It doesn’t matter how wealthy you are, there’s a limit to how much of your money you can withdraw, transfer or deposit at any point in time. For instance, banks are mandated to alert the IRS and FBI about single transactions exceeding $10,000.
And if you need to withdraw huge funds, you may have to jump through hoops, and may be even get your lawyers involved if you have an urgent need. It is not unusual for the bank to try and talk you out of withdrawing as much as $100k at a time. This lack of control over one’s funds is worrisome.
The system is convoluted, no thanks to bureaucracy. It’s ironic that the bank will take your deposit in an instant –no matter how large it is- but is often reluctant to give you your funds in an instant too.
With cryptocurrencies, that’s not a problem. You can transfer or deposit as much funds as you want without any worries. It’s fast, easy and seamless.
Lacking Consumer Trust
In 2008, the Lehman Brothers filed for bankruptcy, triggering a series of events that sent the global economy into recession. If the Federal Reserve Bank and the US government hadn’t intervened, the world would have experienced another depression era reminiscent of the 1920s.
Investigations into the cause of these events revealed a system that was mired in financial misappropriation, funds mismanagement, greed and avarice among bank managers. Naturally, this heralded a new era of complete lack of trust in traditional banking system.
Subject to Human Errors and Negative Inputs
All banks and financial institutions are controlled by human beings. Since humans aren’t perfect, there’s bound to errors in transactions and organizational processes.
These individuals will decide to give loans to, what new policies to help or alienate small businesses and so much more. These are usually drive by the ulterior motives or interests of interested parties.
As a result, you can never have a truly objective financial system, just interests of various entities ably represented.
Can Cryptocurrencies Solve Some of These Problems?
There are quite a few of these problems that crypto might be able to solve:
Bureaucracy and Red Tape
If you hate red tape when it comes to your money in the bank –we’re guessing you do- then cryptos provide multiple alternatives to that. With cryptocurrencies, your monies are essentially in your control.
You don’t need permission from your bank manager or the government to withdraw the money they gladly collected from you without any procedural delays. You can transfer however much you want to at any time, to anyone you want or move any amount you like without worrying about the IRS or FBI.
Centralization and Payment Delays
Depending on where you’re sending money to, bank transfers can take anywhere from same day to five business days.
With cryptocurrencies, transactions are usually executed immediately and funds transfer done instantly. This is possible because the platforms are decentralized and run efficiently thanks to blockchain.
High Transactions Costs
Funds transfer typically costs money. Transaction costs are often dependent on the amount of funds to be sent. Whatever the case, the costs typically vary from 1 to 5 percent or more, depending on the bank.
With cryptos, transaction fees are often so minimal you wouldn’t even know it was there. It is possible to move millions of dollars and pay just $5 for the entire transaction.
Security of Funds
As long as you keep your wallet details safe and secure, chances are your wallet will never get hacked. Just ensure that your computer and the network you use in logging into the wallet are secure.
Take all the necessary preventive measures to keep your computer safe. Update your antivirus, don’t download files from unknown sources, avoid clicking links in mails from unknown persons and put your wallet on a virtual machine that’s sandboxed from the PC.
Cryptocurrency’s Current Limitations
While they do have great potential for growth and ubiquitous use, cryptos are still in their infancy and have pretty significant limitations. This is why it cannot take over the banking sector now.
So, banking products like investment banking and private wealth management are out of the purview of cryptos. The same goes for insurance underwriting, credit facilities, loans and mortgages.
These are still largely untapped by cryptocurrencies. There’s no cryptocurrency that caters to this. Besides, they have so many intricacies and complexities that requires the input of humans.
At the end of the day, cryptos probably won’t supplant banks. If anything, they may play a contributory or supportive role, making banking processes more transparent, cheaper, faster and more convenient for users.