One of the most exciting developments in the crypto space in 2021 is that more and more businesses have started to accept cryptocurrencies as a form of payment system. Without a doubt 2021 has been the most significant year for cryptocurrencies in terms of market acceptability and growth.
Cryptocurrencies represent a new kind of internet-based digital currency that has grown in popularity in recent years. Cryptocurrencies have a lot to offer to their users; offering features like decentralization, censorship resistance, and permissionless operation, they represent a new digital economy where everyone is involved, including citizens, institutions, and governments.
Traditionally, cash, bonds, and gold piled up in secure vaults awaiting financial utility represent the archaic standard of the existing banking industry globally. So the million-dollar question is will these new cryptocurrencies and crypto banks pose a threat to the traditional banks? Are they capable of taking over the world? How likely is it that cryptocurrencies will become the de facto payment standard across the globe? Let’s dig in to find the answer!
Comparing Fiat Money with Cryptocurrencies
For starters, let’s explain the principal differences between fiat money (euros, dollars, pounds, etc.) and cryptocurrency (bitcoin, ether, etc.). Unlike fiat currency, crypto currency is a decentralized digital currency that is not controlled by banks and not backed by a government. Due to this, cryptocurrencies cannot be controlled or interfered with by the old ways of governance.
Apart from that, there is fundamentally not much of a different between fiat currencies and crypto currencies. It is possible to refer to both fiat currencies and cryptocurrencies as money or a form of internet currency. As exchange mediums, they both provide ways of storing and transferring value. Goods and services can be purchased with cryptocurrency and fiat currency. In both cases, it is determined by factors such as supply, demand, work, scarcity, and other variables that determine its price.
Limitations within traditional banking
The limitations of traditional banks make cryptocurrencies a far better alternative to consider. Almost anyone who has used a bank for money management, trading, investing, or corporate affairs knows how difficult banks can be. Moreover, there is the looming risk of losing your funds due to market crashes or political instability.
The 2008 global financial crisis clearly demonstrated the vulnerabilities of the banking system to economic catastrophes. Upon realizing that the traditional banking system can collapse, the demand for alternative methods/systems to secure savings/investments/collateral rose dramatically. This is what lead to the creation of Bitcoin and the general acceptance towards it in the years that followed.
The main advantage of cryptocurrencies was to remove the traditional banking system from the entire process, or you could say to completely remove third-party involvement from money management, transfers and trading.
The Benefits of Crypto Banks
One of the principal capabilities of cryptocurrencies is the power of decentralization. Since cryptocurrencies can work with decentralization, it’s impossible for a single point of failure to exist. Furthermore, thanks to the P2P settlement systems that most cryptos use, they are fully operational all day long, weekdays and weekends included.
Businesses and individuals operating in countries where governments control banks and financial institutions can greatly benefit from the financial freedom and independence that cryptocurrencies offer.
As well as using cryptocurrencies increases a consumer’s financial awareness since only they and they alone control their funds and how the funds are going to be used. Security is also given to the user through private keys. Upon losing the private key, users will not be refunded or able to recover their accounts since they alone are the owners of the private keys.
Why central banks are moving towards cryptos
Central banks are also moving towards integrating cryptocurrency like features within them. A recent study by PwC found that more than 85 percent of central banks are currently exploring some form of digital versions of their currencies and experimenting and implementing pilot programs, among other things. So far, China has been the most invested among the big countries, where it has injected more than $300 million worth of a digital yuan into its economy ahead of a more widespread implementation that is anticipated early next year. Investigations are also now underway by the European Central Bank, the Bank of Japan, and the Federal Reserve into digital currencies. The Bank of England may create a digital currency known as a “Britcoin” (similar to bitcoin) in the future. By 2023, Sweden may have an electronic currency and be the one of the first country in the world to become cashless.
Rise of Stablecoins
The cryptocurrency industry as a whole is reaching critical mass, with a total market capitalization of $2.2 trillion, with bitcoin accounting for half of that amount. “Stablecoins,” which are a kind of nongovernmental digital token that is linked to a set exchange rate to a currency, have grabbed the interest of central bankers in particular.
To facilitate both internal and cross-border transactions, stablecoins are gaining popularity, especially in underdeveloped countries. Stablecoins are being considered for integration into social media and e-commerce platforms by technology and financial businesses. Central banks are seeing Stablecoins in a similar fashion how incumbent large corporations see startups. As startups disrupt the industry by bringing in new innovation and business models, similarly stablecoins are bringing innovation within the banking and payments industry.
Changing economic trends
New payment technologies have resulted in a substantial rise in the number of transactions completed by users per day. There has also been a rise in digital payments and the fact that the bulk of purchases are also not done with physical currency. For example, between 2010 and 2020, the percentage of cash transactions in the United States fell from more than 40% to less than 25% of total transaction volume. (The post-COVID standard will probably be much lower.)
There has also been a shift of consumers towards cryptocurrencies; as peer-to-peer networks are becoming more popular for trade, governments run the danger of losing control over their monetary policies—instruments that central banks employ to maintain tabs on inflation and financial stability.
But there is an upside to this: digital currencies are also gaining traction for “financial inclusion,” which is the process of reaching individuals who do not have access to a bank account or who pay exorbitant fees for simple services such as check cashing. According to the Federal Deposit Insurance Corporation, about seven million families in the United States are unbanked, or 5 percent of the total. In recent weeks, Democrats in Congress introduced legislation to create a digital dollar wallet known as a FedAccount, intending to reach the financially disadvantaged.
It is also possible for governments to better focus their economic strategies utilizing cryptocurrencies. In the future, stimulus checks may be placed directly into the crypto wallets of citizens. This may also allow users to avoid using checking accounts or applications that collect fees. It may be a method to get money into people’s hands more quickly while also keeping track of how they spend in real-time. Digital currencies can also be programmed to perform certain functions, which will incentivize people to spend their stimulus cheques in CBDC if they disappear from their digital wallets within three months, which will help to boost the economy.
The rise of Crypto Banks in the Metaverse
There is a massive rise in popularity of virtual shared spaces also known as Metaverse in the crypto world. Since the Metaverse is the digital version of the real world, there is a need for payment services and systems. Crypto banks offer Metaverse users payment services to buy things like NFTs, virtual credits, and in-game purchases of different gaming platforms.
If we look at the statistics, the Metaverse economy is very substantial based on the available data. In 2018, about $54 billion was spent on virtual goods, skins, and gaming lives, compared to $42 billion spent at the film office and $30 billion spent on recorded music in 2019.
Therefore the Metaverse economy is a significant vertical for Crypto Banks to capture. Since traditional banks can’t even compete in this sector, Crypto Banks control 100% of the market share.
Crypto banks have the potential to solve some of the pressing issues in the global financial systems. They can bring in more people to the banking sector, and reduce infrastructure costs. Economies can grow at a massive scale and more oversight can incorporated to the flow of money thanks to the digitization features of cryptocurrencies.
Over the course of a few years, the crypto-economy will be expanded to a value of more than 10 trillion dollars. Crypto-banks will represent a new turning point in developing the link between the decentralized economy and our future daily lives by expanding the payment infrastructure, creating new cryptocurrency payment scenarios, and reducing interest rates. With the rise in demand for cryptocurrencies for DeFi applications and E-commerce activities in the digital realm, the need for crypto banks will increase further. The future belongs to digital banks, and traditional banks face the risk of extinction if they don’t innovate fast enough or adopt the decentralization features of crypto banks.