Education

How Will Cryptocurrency Disrupt the Banking Industry?

Banking in the coming decades will be almost unrecognizable as cryptocurrency technologies drive an around-the-clock, more flexible, personalized experience.

Our current fiat currency system — tied to governmental central banks — is a product of the gold —  and paper-based economies from which it grew, facilitating the growing economy of colonialism. 

In contrast, blockchain-based cryptocurrencies show the hallmarks of our new digital reality. In the same way that computers have upended industries from manufacturing to medicine, our financial institutions are being disrupted by virtual currencies without a central coordinating authority.

What’s the Status Quo?

Today, banks are the hub-and-spokes of almost all our financial life, from paper checks to ATMs and debit/credit cards, all of these run through the banking system. The upside to this centralization is maturity that  has given governments time to put regulations in place to protect the consumers (like the FDIC bank account protection that insures depositors’ investments should a bank become insolvent). 

The downside is what’s always the inevitable result of any monopoly on services: high fees and low speed. (If you doubt this, try to wire money between banks and marvel at how much it costs you and how long it takes.)

What’s Going On In This Banking Revolution?

The history of banking has been ever-increasing sophistication in logging financial transactions between parties who are near each other, synchronizing debits and credits in a centralized source of truth. Banks also proxy trust between distant parties with complex processes that include notaries, built-in blocks and delays. 

Of course, in our world-spanning Internet, parties may never meet but want to have a financial relationship (and have it without the added processes and delays).

Disruption No.1 — No Bank Needed for Trust

Blockchain technology allows far-flung parties to come to an agreement on the state of a shared database (which is all a ledger is) without meeting in person and exchanging documents, or even without using a trusted middle man.

The untrusted parties have access to a ledger without an administrator through technology. This is the most fundamental disruption of the banking industry, which has dominated global finance since the 1600s.

We already see the digital revolution disrupting remittances — those monies sent home by workers laboring in foreign lands. The old system of very expensive and exceedingly slow Western Union transfers has been rendered obsolete almost overnight by blockchain technology.

Disruption No. 2 — Excruciatingly Slow, Lengthy Paper Contracts are History

A static number scratched into a paper ledger and digits appearing in a cell of the traditional computer spreadsheet are considered “dead” or “dumb” because they don’t do anything more than just represent a value. 

In contrast, entries on the blockchain can perform actions in response to changing circumstances. For example, smart contracts automate manual processes including mortgages, claims processing, and the distribution of assets as specified in a smart will.

It’s not just individuals: Corporations’ legacy processes around governance, data sharing, and collaboration will be modernized by blockchain’s cousin, “distributed ledger technology” (DLT). All of these require coordination and don’t specifically need centralization (the primary convenience provided by the banking system).

The key word to these disruptions is “disintermediation” — removing the roadblock that is the old banking system in favor of technologies which operate at the speed of a computer, rather than that of an accountant.

Disruption No. 3 — Payments Get Faster, Cheaper, and Smarter

Replacing the banks’ last-century slow technology and manual processes with a trusted digital ledger. Trust is established and maintained through cryptographic algorithms which prove identity and encrypt actions) 

Blockchain disrupts the following mainstays of the banking system:

Payments. By establishing a decentralized ledger for payments, blockchain technology facilitates faster payments at lower fees through any financial asset that uses the blockchain, from Bitcoin to stablecoins. The customer chooses the vehicle on criteria including currency volatility and transaction cost.

Clearance and Settlement Systems. Distributed ledgers reduce operational costs and bring us closer to real-time transactions between financial institutions, a direct result of removing a third-party agency. For example, the UK’s Office of the Comptroller of the Currency (OCC) announced that national banks and federal savings associations can now use public blockchains and stablecoins to perform payment activities, putting these new digital technologies in the same category as the established ways of clearance and settlement: SWIFT, ACH, and FedWire.

Loans and Credit. Removing the gatekeepers in the loan and credit industry opens up access to money to new populations of would-be borrowers and lenders. Microloans, especially to new businesses in underbanked communities, are a potentially rich source of borrowers who have shown eagerness to avail themselves of lower interest rates for secured loans from new populations of lenders who desire passive income.

Disruption No. 4 — Capital Markets Become More Agile and Responsive

The business community can also reap the benefits of a real-time economic engine with a trusted ledger and associated smart contracts.

IPOs & Fundraising: Traditional IPOs require access to capital from traditional capital-raising services and firms, long criticized for blocking out most investors from taking advantage of new investment opportunities. Token sales are, instead, experimenting with new models of financing that unbundles fundraising from privileged access to capital.

Securities: By tokenizing traditional securities — primarily stocks and bonds — and placing them on public blockchains — this new technology can create more efficient, interoperable capital markets, available around-the-clock and accessible with the cryptocurrency which most meets the investors’ needs.

Trade Finance: The same modernization of paper-heavy bills of lading in favor of the blockchain creates an ecosystem of transparency, security, and trust among global trade parties.

Disruption No. 5 — Shared Encrypted Information Makes Financial Applications Faster

Customer KYC and Fraud Prevention: Know Your Customer (KYC), anti-money laundering (AML), and countering the financing of terrorism (CFT) regulations require customers to provide personal information and companies to authenticate government-issued documents such as passports or driver’s licenses. 

Storing this information in those distributed, decentralized blocks of the blockchain — along with previous approvals from other financial institutions — makes it easier to apply to new financial services, safer than sharing documents via email, and faster because prior authentications become a matter of public record. Sharing information with and between financial institutions becomes fast and uneventful, making for happier customers and a lower barrier to entry to offer new services.

Conclusion

Cryptocurrencies and their underlying blockchain technology disrupts many aspects of the centuries-old central banking system. Removing the need for a trusted middleman in favor of a worldwide trusted distributed ledger opens the door to easier, safer, and faster interactions with the financial world, from payments to inter-bank transfers to access to loans.

Download the Abra app (Android, iOS) and begin trading or earning interest on cryptocurrency today!

 

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