The latest trend that set the heather on fire: cryptocurrencies. It’s been the most popular topic in the finance sector time by time, wave by wave. It’s made the scene once again, with its most popular pioneer “bitcoin” on the rise. Yet, the topic is quite controversial because of many different parameters to take into consideration.
To begin with, cryptocurrencies threaten the traditional mindset of the banking industry. They are decentralized, and actually created to propose an alternative to the methods everybody’s used to. Hence, it can be interpreted that this digital asset targets to fill a gap that couldn’t be filled with traditional finance operations. However, when this gap is filled with an asset that’s free of regulations by centralized governments or banks, this is assessed as dangerous by these organizations.
Interestingly, cryptocurrencies are quite secure in their own terms. Since they are operating with blockchain technology, the decentralization of the sources and information actually strengthens their security. According to this article by Forbes, this is because of the blockchain networks creating thousands of different focus points that are responsible for security collaboratively.
Therefore, the virtual currencies are capable of creating controversies thanks to their existence alone. Keeping these in mind, how should financial institutions approach these digital assets?
To Adapt or Not To Adapt
That’s the dilemma to solve. Cryptocurrencies have earned their spots in the financial world so either ignoring or implementing them to the operations are the steps that can be taken. In order to resolve this uncertainty , the pros and cons of these digital currencies should be stated.
First of all, they are advantageous in terms of payments. This is the point in which cryptocurrencies gained popularity and importance. They are quick at taking action in terms of digital payments and this provides convenience for account holders. Blockchain technology provides a faster and less expensive alternative to clearing houses when processing transactions.
They also utilize distributed ledger technology, which is renowned as the “cousin of blockchain”. According to Investopedia, distributed ledger technology (DLT) “allows for storage of all information in a secure and accurate manner using cryptography”. Thus, a certain level of secureness is attained.
In line with these, there are banks that already adapted to cryptocurrencies. These traditional bank generated coins are called central bank digital currencies (CBDC). For example, there is JPM Coin, produced by J.P. Morgan to adapt the changes and utilize their benefits. Since an important actor in the banking industry implemented this technology, virtual currencies attained a certain level of validity.
Furthermore, this striking research underlines the potential of cryptos forthe banks. 60% of crypto owners state that they would apply for their own banks to invest in cryptocurrencies if they were able to. Among the consumers who entered into the world of cryptocurrencies, more than fifty percent stated that they’d certainly use their own traditional bank if it provided the service or possibility to invest in cryptocurrencies. In addition, 32% of the customers are considering whether they might benefit from these payment systems or not. Among those, only 4% of current crypto owners stated that they wouldn’t apply for their banks to take actions in terms of crypto because they are loyal to the exchange used.
However, although there are positive statements about cryptocurrencies coming from the customers, they are also quite controversial and pessimistic approaches towards them. According to the Boston Consulting Group:
“Financial services leaders remain skeptical of the value that cryptocurrency has as an asset class, and individual cryptocurrencies have lost market capitalization at times. During the COVID-19 crisis, cryptocurrencies experienced volatility, and their reputation was tarnished by the association of Bitcoin with criminal acts such as the Twitter hack of July 2020.”
Therefore, since they can’t be regulated like fiat currencies, they also contain dangers to the central organizations. Systems like these can’t be entirely trusted without an extensive due diligence report.
Two years earlier, the Basel Committee on Banking Supervision claimed that cryptocurrencies “do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value.” Thus, four practices are claimed to be essential in case of the offerings made: due diligence for the customers, a method to allow internal governance and risk management framework, disclosure of all related activities in financial statements, and an appropriate dialogue with regulatory supervisors.
Any bank account that holds cryptocurrencies is prone to uncertainties that may either end up as an advantage or a drawback. There are apparent pros and cons to evaluate and the world of banking is divided in terms of handling this novelty. Some leaders among the financial institutions have already adopted this new technology while others are rather cautious to approach it.
Even the topics of discussions about cryptocurrencies are controversial: Are they safe or do they just invite threats? Is being out of regulations positive or not? In the end, all of these questions and uncertainties are related to what type of perspective an organization wants to reflect. Friend or foe, there is no doubt that they are in the future of banking.