Cryptocurrencies have consolidated their place as the emerging currency in the financial world. In contrast to central banks, cryptocurrencies are backed by computer code rather than physical assets such as bank deposits. There are approximately 11,000 cryptocurrencies in circulation at the moment. The popularity of a select few, such as Bitcoin and Ethereum, has gained widespread attention and acceptance.
Cryptocurrency banking is a relatively recent phenomenon that manifests itself in a variety of ways. Cryptocurrency is mainly used as an investing instrument by most people. On a trading platform, you may purchase and sell digital currencies, among other things. Traditional banking involves managing credit and currency at a financial institution, which may include checking accounts, savings accounts, and loans.
A financial technology business or a financial services organization that engages in crypto banking is referred to as a financial services firm. One or more financial services, such as keeping track of a balance, making payments, or even generating interest, maybe offered using one or more cryptocurrencies. Several financial institutions have included cryptocurrency in their offerings.
Blockchain technology allows untrusted parties to reach mutual agreement on the status of a database without the need for a third party to act as a mediator. The use of a blockchain would make it feasible to offer certain financial services without banks since it would create a ledger that no one would be responsible for maintaining.
Aside from that, blockchain technology allows for the use of technologies such as “smart contracts,” which are self-executing contracts created on the blockchain and can potentially automate a wide range of labor-intensive procedures, from compliance and claims processing to the distribution of a will.
A subset of blockchain known as ‘distributed ledger technology (DLT) has the potential to assist corporations in establishing more robust governance and rules around data sharing and collaboration for use cases that do not need a significant degree of decentralization.
The blockchain and distributed ledger technologies have the potential to disrupt the $5 trillion banking sector by disintermediating essential financial services, such as:
- Quick and simple payments
- Simplifying clearing and settlement processes
- A new way for assets trading
- Making it easier to raise funds
- Getting credit and getting a loan
- Streamlining Trading Finance
- Using blockchain technologies for digital identity verification in banking
- Accounting and auditing systems that use blockchain technology
- Opening up Hedge funds
- Instant peer-to-peer transfers (P2P)
Let us explore how blockchain technologies can enable crypto banks to provide better services than traditional banks.
1. Ensuring quick and simple payments
Faster payments and cheaper processing costs are made possible by using new technology and a decentralized payment route (e.g., crypto). A new level of service, new goods, and more competition for FinTech companies may be provided by banks with increased security and less costly payment methods.
Crypto Banks will also significantly decrease the time it takes to conduct standard bank transactions by using blockchain technology. By the year 2025, 90% of the members of the European Payments Council think that blockchain would profoundly alter the financial sector.
2. Simplifying clearing and settlement processes
Distributed ledger technology, such as blockchain, may improve the ability to record financial transactions and allow transactions to be settled directly with banks. Because of our outdated banking system, transfers may take more than a few days to complete.
When transferring money across foreign borders, financial institutions must contend with logistical issues. Before it reaches its destination, the transfer must pass through a complicated network of intermediaries. Furthermore, the global financial system has to be a balance reconciliation since it engages many funds, asset managers, traders, and others.
Blockchain technology will also allow cryptocurrency banks to have a clear and transparent record of all transactions. Banks will no longer need to pay for a network of custodial services and other regulatory organizations like SWIFT. This approach, instead, may allow two parties to trade directly on a public blockchain.
3. A new way for assets trading:
By eliminating the intermediary, blockchain technology decreases costs for exchanges of assets and lessens the volatility of conventional securities markets. Reports have said that trading firms may save $24 million annually by using blockchain technology to move equities worldwide.
One of the fundamental functions of asset ownership is the capacity to purchase and sell assets according to who owns what, to be successful, financial markets need several institutions that provide exchanges, brokerages, central securities depositories, and custodian banks. It’s been in place for all these various gatherings throughout the years..
Electronic transactions are complicated because the buyer and seller do not always use the same custodian banks, and the custodian banks do not always utilize third parties to retain the paper certificates.
Blockchain-based technologies help solve that. A token representing assets stored off-chain on a distributed ledger may be utilized as a cryptographic token. Several blockchain firms are also working on real-world asset tokenization, including gold and real estate. A reduced asset exchange transaction cost will also be brought about by getting rid of the intermediary.
4. Make it easier to raise funds
In today’s market, raising money via venture capital is very tough. The following is the most often seen scenario:
Entrepreneurs spend many hours putting up presentation decks, meeting with potential partners and engaging in long discussions overvalue and equity to sell their business for a monetary sum.
In contrast, fundraising for blockchain-based companies is much easier. Companies can rely on crypto-based fundraising to seek money via various means to expedite the development process. Crypto companies can use three kinds of fundraising schemes they can either make an initial exchange offering (IEO), An equity token offering (ETO), or a security token offerings (STO). STO is the most common choice because of the legal protection it provides. For projects to be eligible for this approach, they must undergo extensive due diligence.
5. Getting credit and getting a loan
Traditional banks banks use credit reporting to decide whether or not to provide a loan. On the other hand, Blockchain-based technologies can facilitate peer-to-peer loans, quicker and more secure credit lending, and even sophisticated programming technologies that can mimic syndicated loans. These are the hottest applications of blockchain in the credit and loans sector.
6. Streamlining Trading Finance
Blockchain technology will also have a significant impact on the field of trade finance. Trade finance refers to a financial activity that is linked to international trade or commerce in some way. Many trade finance operations, including as invoices, letters of credit, and bills, continue to be accompanied by paper-based documentation. Fortunately, many order management systems allow you to do this task online, although the procedure may be time-consuming.
Using blockchain technology, trade finance will become less reliant on time-consuming manual procedures, paperwork, and bureaucracy, and the trading process will become more streamlined.
7. Using blockchain technologies for digital identity verification in banking
Identity verification is one of the most critical steps in banking. Blockchain technology allows businesses and consumers to authenticate information in real-time much more efficiently. In other words, blockchain technology enables the secure reuse of identity verification for other services.
The invention in this field is most well-known for being Zero-Knowledge Proof. ZKP-based solutions are being developed by a significant number of nations and significant businesses.
Users can select how and with whom they want to identify themselves, thanks to blockchain technology. It will only be necessary to register one blockchain identity at a time. As long as the blockchain is likewise present at those service providers, there is no need to repeat the registration process. This is done in addition to ensuring that the information is stored on a blockchain, which increases security even further.
8. Accounting and auditing systems that use blockchain technology
The potential for blockchain technology to transform accounting and auditing processes is enormous. The technology can increase the efficiency of accounting systems while also simplifying compliance.
Blockchains will operate in the same way that digital notaries do now, by verifying every transaction. Such apps may also use smart contracts on the blockchain to automate the payment of bills.
9. Opening up Hedge Funds
The number of hedge funds dealing in cryptocurrency has more than doubled in the past few years.
A decentralized crypto hedge enables investors and strategists to engage via an open platform. In the conventional hedge fund model, the fund is managed by an organization wholly comprised of fund managers. With this level of decentralization, blockchain has the potential to be an excellent tool for extending financial services.
10. Transfers between peers (P2P)
Blockchain technologies simplify payments. Using a P2P technique, users can transfer money between bank accounts or credit cards via the internet.
Due to the distributed nature of blockchain, peer-to-peer transactions may take place anywhere in the globe, regardless of geographical limitations. The receiver will not have to wait four days to get their money since blockchain-based transactions will be completed immediately instead of traditional transactions.
In terms of strengthening the connection between the decentralized economy and our future everyday lives, cryptocurrency banks will mark a watershed moment by extending the payment infrastructure, introducing new cryptocurrency payment scenarios, and lowering interest rates. Increasing demand for cryptocurrencies in decentralized financial applications (DeFi) and E-commerce activities in the digital world would increase the need for crypto banks. Digital banks will rule the world in the future, and conventional banks will face extinction if they do not innovate quickly enough or embrace the decentralized characteristics of cryptocurrency banks.
Crypto banks can solve some of the world’s most pressing issues. They have the potential to attract more individuals to the banking industry while also lowering infrastructure costs. Because of the digital characteristics of cryptocurrencies, economies may develop on a vast scale, and greater supervision can be integrated into the flow of money due to this.