Cryptocurrencies are gaining massive popularity, and no one can deny that. Between 2018 and the last quarter of 2020, the number of cryptocurrency users increased by 66 million. Both the private and public sectors are eagerly embracing cryptocurrencies as a means for payments, storing value, and investing.
Decades ago, when cryptography began to advance digitally, it gave birth to cryptocurrencies. This type of technology has made cryptocurrency networks safe and reliable to carry out different types of transactions, helping to develop and evolve many kinds of encryption techniques.
In summary, blockchain is the main technology that gave birth to today’s most secure and valuable cryptocurrencies. Blockchains act as shared ledgers that produce immutable records through cryptographic techniques, facilitating transfers of assets and tracking transactions.
As the Massachusetts Institute of Technology points out, one of the perks of blockchain is that it’s considered a general-purpose technology. This means that it has many potential applications across many industry verticals. Thus, crypto, driven by Blockchain technology, makes perfect sense for banks.
Interestingly, market capitalizations for Bitcoin and blockchain are expected to reach $23.3 billion and more, respectively. According to analysts, the overall market capitalization of cryptocurrencies will reach $1087,7 billion by 2026.
The very eye-catching numbers continue to propel crypto banks to dominance, while traditional banking have already started to several repercussions.
An American public survey showed that 79% of people have heard about cryptocurrencies, and many are investing in it. Coinbase, the world’s second-largest cryptocurrency exchange, has 56 million registered customers.
These are some of the statistics that demonstrate the power of the crypto sector. So, let’s take a deeper look at why the cryptocurrency is the future of banking.
Making Payments Easier
Thousands of dollars every day are lost in an antiquated payment system with added fees.
A business owner working in Australia who wants to transfer part of their paycheck back to their family in Liverpool may need to pay $25 in flat fees, plus additional fees of up to 7%. There are exchange rate fees you’re charged. The bank that receives the money gets a cut, and your bank gets a cut. Banks can take up to a week to register a transaction.
Payment clearing is highly profitable for banks, which makes it difficult for them to reduce fees. In 2019, cross-border transactions, such as payments and letters of credit, generated $224B in payments revenues.
As with Bitcoin, Ethereum, or other cryptocurrencies, they allow anyone to send and receive money using a public blockchain. This allows for quicker, cheaper, and borderless payments worldwide by bypassing the need of third-party verification.
In extreme cases, bitcoin transactions can take a few hours or days to settle. Meanwhile, Bitcoin transactions settle in about 10 minutes on average. This is better than the average bank transfer processing time of three days. Crypto-based transactions are a complex and decentralized form of transaction, making them difficult for governments and regulatory agencies to monitor, control, and crackdown on.
In addition to scaling faster methods of transacting crypto, developers also aim to create cheaper solutions. Several cryptocurrencies, such as Bitcoin Cash and TRON, offer relatively low transaction fees.
Simpler Payment Clearance and Settlement
Our financial infrastructure plays a significant role in why an average bank transfer takes three days to settle – as described above.
This doesn’t only affect consumers only. It is logistically challenging for banks to move money around the world. Today, on the way to any destination, a simple bank transfer around one account to another has to go through a complex system of intermediaries, such as correspondent banks or custodial services. Traders, funds, asset managers, and others all participate in the global financial system, and their balances must be rebalanced across the network.
Whenever you want to transfer money from a Country A bank account to a Country B bank account, the money transfer will be executed by the Society for Worldwide Interbank Financial Communication (SWIFT), which transmits 37.7M messages per day on behalf of more than 11,000 banks.
If the two countries don’t have financial connections, the bank accounts must seek a correspondent bank via the SWIFT network to conduct the transaction, which involves heavy fees. To do so, there is a charge that must be paid. Each correspondent bank maintains its ledgers, both at the receiving and originating banks.
SWIFT does not transmit funds, it only transmits payment orders over SWIFT. To process the money, an intermediary system is used. By adding intermediaries to the transaction, the transaction becomes more expensive, and the transaction can become compromised. Approximately 60 percent of B2B transactions require manual intervention, and each transaction takes between 15 and 20 minutes.
In this situation, blockchain technology could disrupt the dominance of central institutions. Transparency and public visibility of all interbank transactions in an interbank blockchain would be more convenient than SWIFT as an intermediary. Therefore, the decentralized ledger built on top of blockchain technology makes it possible for transactions to be settled directly on a public blockchain rather than through custodial services and correspondent banks.
Moreover, blockchain technology allows for transactions to clear and settle when the payment is made. This is contrary to the existing banking system, which clears and settles transactions days after they are made.
A worldwide network of correspondent banks may potentially reduce the high maintenance costs associated with one. According to an Accenture study among eight global banks, blockchain technology could drive down average transaction costs by $10B each year.
Intuitive Trade Finance
Providing trade finance to exporters and importers ensures that they can conduct international trade, mitigates risks, and extend credit. It is a key part of global finance, yet it is often characterized by dated, manual and written documentation. Blockchain implementation can simplify and streamline trade finance, cutting importers, exporters, and their financiers’ costs by billions of dollars every year.
Blockchain technology has been increasing its presence in trade programs for a few years, but its mainstream role in invoices and credit has recently begun to emerge.
Due to outdated, uneconomical, and old manual processes, the trade finance industry has suffered from logistical setbacks for many years. To make sure that payment will be received, physical letters of credit are still sent from one bank to another.
Using blockchain technology, importers and exporters could receive stronger assurances of delivery and improved visibility into the shipments moving through their pipelines by securely and digitally proving details about the country of origin, the product, and the transaction (and any other documentation).
One of the most significant hazards to trade parties is the potential of fraud, which is amplified by a lack of secrecy and minimal supervision over the movement of products and documents. This increases the likelihood of the same shipment being mortgaged several times. This unpleasant event occurs so frequently that commodities trade financing banks write it off as a cost of doing business.
Depending on the delivery or receipt of products, importers and exporters might make tokenized payments using blockchain technology. Alternatively both parties can use smart contracts to establish payment procedures that would ensure automatic payments and eliminate the likelihood of lost shipments, expired invoices, or mortgaged shipments again and again.
In trade finance, blockchain technology can strengthen trust between trade partners, therefore promoting global commerce while also hiding sensitive information like pricing and trade secrets wherever appropriate.
As well as providing additional information about where and when products are sent, it would inform consumers. Data like this is commonly missing from older systems. Furthermore, a blockchain may enable clients to keep informed at every transaction stage, thereby greatly increasing transparency and confidence.
Let’s have a quick overview of what we learned about the issues the banking system is facing today:
- Cryptocurrency users have increased by 66 million between 2018 and 2020, which indicates that more people are interested in it.
- With each passing year, cryptocurrency market penetration is increasing rapidly.
- With blockchain technology, payments can be transmitted securely and cost-effectively without requiring third-party verification faster than traditional bank transfers.
- Compared with existing protocols such as SWIFT, distributed ledger technology allows transactions to be resolved immediately and tracked better.
- By exploring blockchain and distributed ledger technology, cross-border commercial transactions that would otherwise be prohibitively expensive can be profitable. It would also save time and paper.
As discussed above, the current banking and financial systems faces many geo-political and regulatory constraints which is limiting their reach to a wider audience especially in the fast moving digital age we live in today. In addition to this these systems also have problems with fundraising, securitization, loans, and credits, among other issues. Consequently, the blockchain technology is the only solution that can get rid of all of these problems. The recent rise in cryptocurrencies adoption and the move of institutions, corporations and even countries signify that cryptocurrencies are going to be the future. Traditional banks have two options either they can innovate and adopt the technologies behind cryptocurrencies or wait for cryptocurrencies and crypto banks to make them redundant.