Are cryptocurrencies and blockchain technology on the verge of displacing established banking and financial systems? And could they also constitute a serious threat to central banks around the world? The short answer is yes. Central banks could face an existential danger from cryptocurrencies, and so far, national financial authorities have responded by saying, “If you can’t beat them, join them.”

Crypto Banks and Decentralized Finance can and will replace banking and traditional finance. Cryptocurrencies may readily replace fiat as a store of wealth, medium of trade, and unit of account in all of its applications. Decentralized blockchain-based systems provide a number of benefits over conventional banking systems, including faster transactions, better levels of security, reduced costs, and the use of smart contracts. Thanks to Crypto Banks and Decentralized Finance, we can already lend or take out a loan, raise funds for initiatives, and make payments. And this is only the beginning.

Many people believe that a more efficient digital decentralized economy might quickly replace banking and finance. Will it, however, take place? Keep reading to find out more.

Crypto adoption vs. Governments

The world’s most powerful institutions are banks and governments. It would be naïve to believe that they will stand by and watch as crypto and blockchain take their place. Taxes must be paid, and the government must be run. Nearly every world power has considered releasing a digital version of their money through their central bank at this point, primarily to prevent Bitcoin and cryptocurrency from getting too much traction.

To avoid going extinct, the new reality appears to be that centralized authorities will use blockchain technologies. Rather than a self-governing paradise, the future is shaping up to include traditional financial institutions and banks as well as blockchain technology. Many central banks, on the other hand, are unsure of what they can contribute. They are, after all, diametrically opposed to Bitcoin’s original idea, which was to create a decentralized and private manner of transacting.

To compete with DeFi systems, central bank digital currency would need to provide many of the same benefits as crypto. Users may move money to CBDC accounts, allowing for lower transaction costs and fewer intermediaries between transactions. As a result, central banks may be forced to let commercial banks to fend for themselves, resulting in a reluctance to intervene.

“These factors will put commercial banks under more competitive pressure. They are at risk of being disinter-mediated, according to Barron’s via Morgan Stanley.

To give more value to their customers, commercial banks and financial services will need to evolve. The truth is that when the general public grows more knowledgeable about crypto and decentralization, they will see the benefits in the future of money and the internet.

The other option for avoiding being replaced is to outright ban crypto, although many people doubt that this will happen. The public favours innovation, and major corporations such as Microstrategy and PayPal have paved the way for a potentially irreversible acceptance of digital currency.

The general public is coming to grasp that cryptocurrency is much more than Bitcoin, and that blockchain and DeFi have much broader applications. People will always win out, and what they want most is more convenience and better answers to their issues.Because of the increasing interest from individual and institutional investors, the financial system is approaching a tipping point, which may result in the ultimate elimination of banks and finance as we know it.

Interestingly, many eager investors have started flocking to cryptocurrency and decentralized financial infrastructure (DeFi) because of the amazing profits, which may reach hundreds of percent in terms of return on investment. But there is a subset of long-term investors who see Cryptocurrencies’ immutable worth as a currency, see it as something more than a store of money or a trading coin.

There appears to be an upward trend in interest in crypto as the media spotlight shines more brightly on it As more information about the ramifications of blockchain technology becomes public, more investors are growing interested in cryptocurrencies, decentralized finance, and crypto banking.

The state of Crypto banking

The market is flourishing with opportunities as businesses start to offer interest-bearing accounts like traditional banks. With Crypto exchanges and Crypto Banks offering financial products that are disrupting and outperforming traditional banking and lending, Cryptocurrencies have enjoyed a significant rise in consumer interest. Apparently 11% of consumers between ages 18 and 32 used their stimulus cheques to invest in crypto assets.

Moreover, there’s a rising number of users opting for crypto savings accounts. However, while you can hold your assets in a savings account and gain 10% in returns on the balance, or use your assets to secure loans without credit checks, governments and regulators are concerned about the decentralization, lack of stability that comes with it, and consumer protect that normally comes with traditional financial services the industry provides. This raises the question: are Crypto Banks completely decentralized? And should they be completely decentralized?

Are Crypto Banks Completely Decentralized and Should they be Completely Decentralized?

Cryptocurrencies have been around since the introduction of bitcoin in 2009. Thousands more cryptocurrencies have evolved since then, some with specific goals. These digital assets offer consumers a level of anonymity and security that regular payment systems do not. As cryptocurrency has grown in popularity, exchanges and other platforms have emerged to offer new financial products and services.

Today Crypto banks are providing the opportunity to earn interest on your digital assets, akin to a high-yield savings account. However, instead of paying you a fraction of a percent in interest, some of these banks are offering up to ten percent on specific digital assets.

Furthermore, several crypto banks are also providing crypto-backed loans, which allow you to utilize your portfolio as collateral to receive a loan, similar to securities-based lending. Interest rates are generally low—often in the single digits—and no credit checks are necessary.

In both cases, Crypto banks are providing opportunities to people who had previously been denied access to certain financial services. If you have less-than-perfect credit, it will be difficult to acquire a low-interest traditional personal loan, and most banks and credit unions provide pitiful returns on deposit accounts.

Furthermore, according to the Federal Deposit Insurance Corporation (FDIC) around 7.1 million families in the United States are unbanked, and crypto savings accounts do not have the same requirements to open as traditional bank accounts.

While the financial services provided by Crypto banks may seem tempting when compared to their traditional equivalents, there are major dangers that consumers are facing with these products, which they may be unaware of.

To begin with, while cryptocurrencies have grown in popularity over the years, they continue to be incredibly volatile. If you take out a crypto-backed loan and the value of your assets falls dramatically, you will risk a margin call. In this case, you’ll have to either make an additional deposit or wait as the provider sells part of your assets to offset the loss. And, because you’re borrowing money, it’s unlikely that you’ll be able to make that extra deposit, so you may wind up losing assets.

Some crypto experts claim that stablecoins are the solution because they are linked to an external and more stable source, such as the US dollar. Even so, assets like Tether have come under scrutiny for not having enough fiat currency reserves to back them up completely.

Earning a high yield on your investments with crypto interest accounts might also be appealing. The assets you have in a cryptocurrency account are not safeguarded in the same way that they would be in a traditional bank or investment account if the platform that supplies the account or the coin itself goes bankrupt. Finally, despite their greater security, crypto networks are still vulnerable to hacking and fraud, and there aren’t enough regulations in place to safeguard customers in these situations.

Which is why most Crypto Banks are not entirely decentralized and they shouldn’t be decentralized either. Decentralization of Cryptocurrencies are among the main factors that cause the volatility of Cryptocurrencies. The lack of regulation is why they’re so speculative and highly volatile.

Which is why CBDC might be the perfect solution for crypto banks in the future. Traditional Banks are getting their hands wet within the Cryptocurrency and digital currency sector. They understand that there’s no way they can suppress the emergence of the crypto market and instead of beating them and slowing the process down, they should join them.

With Payment Giants announcing their plans to adopt cryptocurrencies into their network, major banks are starting to invest in the sector and roll out more centralized and regulated digital currencies based on blockchain technology.

Interestingly, Central bankers are investigating the possibility of issuing a government-issued cryptocurrency. In theory, this would combine the convenience of crypto with the dependability of money administered by a central bank. Many countries, including the United States, are considering creating a digital currency backed by a central bank.

Concluding thoughts

While Crypto Banks are evolving the world of finance, it might not be the best approach to make it completely decentralized. Similarly, it might not be the best approach to make it completely centralized either. Governments and Financial institutions hold too much power in our lives, which is why a certain level of decentralization is necessary. This is an ongoing paradox for most Crypto Banks as they establish themselves in the market and question if they should be completely decentralized, completely centralized, or somewhere in the middle; however, one things certain is that Crypto Banks are the future and they’re definitely doing the world a favor with their services.