Anyone who has been paying even the most remote form of attention will understand that cryptocurrencies have become more than just a fad. Bitcoin and other cryptocurrencies have provided a paradigm shift in how we view finances and the economy. There has been a concerted effort by many across the world to incorporate these assets into daily life and bring them closer to the everyday person.
Today, data from CoinMarketCap shows that the Bitcoin market capitalization is a little over $1 trillion. Essentially, the Bitcoin market is now worth much more than any banking institution in the United States, and the asset itself handles as much in transaction volumes daily as any bank out there. If anyone doubted the Bitcoin revolution years ago, there's no doubt now for sure.
One of the primary reasons why cryptocurrencies have gained so much popularity is the promise they have of providing a more decentralized banking system. Today, we see digital assets as systems that offer a more critical and more inclusive economic system. Considering that banks have been the de facto custodians of the economy for so long, it is pretty easy to see why they will feel threatened by the rise of anything that threatens to make them obsolete.
Still, it is worth understanding the fear factor and why banks are so wary of Bitcoin in the first place.
The Shortcomings of Centralization
Perhaps the most critical threat that Bitcoin poses to banks is that it operates on a decentralized model. Banks are highly centralized bodies that make decisions which ultimately affect their customers and their ability to enjoy financial services. These organizations essentially represent the financial systems of their countries and are custodians of economic access.
The centralization problem is essentially prominent in national banks. These institutions have government bodies as part of their major shareholders, and they have significant sway in their countries' financial landscapes. What the bank says is law, and everyone has to comply - no matter how challenging their policies are.
To be fair, it is worth understanding one significant thing about centralization - it is not inherently bad. Like every organization system, centralization comes with benefits and drawbacks. However, where centralized systems get run by greedy individuals, problems are bound to occur.
When humans are given control over others' financial lives, there's a sense of greed that comes with such power. In a world where everyone is looking to get rich and act to their benefit, centralized banking systems run the risk of being run by people who don't necessarily have others' best interests at heart.
There is also the fact that centralized banking systems tend to be ineffective. In response to the coronavirus, the Federal Reserve implemented several policies that many criticized for their effects on the economy. The result is the American economy dragging and faltering amid the coronavirus and the threat of inflation running much higher than before.
Centralization in itself can be good. It allows for faster decision-making, and everyone understands the chain of command rather well. However, centralized systems can easily be corrupted by dishonest and greedy people who don't necessarily have others' best interests at heart. Inefficiency in centralized banking systems can also threaten economies time and again. Ultimately, everyone feels the sting of centralization's shortcomings, and banks are to blame for that.
Decentralization as a Solution
Interestingly, the concept of decentralization isn't new. There have been different iterations of this concept, but it hasn't been implemented the right way.
This is until blockchain technology came along.
Blockchain technology completely changed how decentralization works, allowing systems to run automatically without any individual at the hem of affairs. With blockchain, operations are run by smart contracts, which take instructions and execute them blindly. There is no potential for manipulation or gaming, and everything can be done with fairness.
With blockchain technology powering Bitcoin, the digital asset has everything it needs to substitute for the old, centralized banking system. Bitcoin works without a middleman's need, facilitating transactions between parties in a fair and equitable environment. Suddenly, you don't need a bank account or follow stringent bank policies to handle transactions or make money transfers. Everything is done across an automated network, and you need to plug in.
With a more effortless operation and less of a boundary to entry, Bitcoin has brought the opportunity for anyone to access banking services. No matter who you are, you can access banking services in the crypto world.
Where Do We Go From Here?
Ideally, this would have been a question of how cryptocurrencies can make themselves more appealing so that banks will embrace them more. However, this isn't such a scenario. Banks are the ones on the back foot, and they are the ones who need to evolve with the times.
When cryptocurrencies came to the limelight, industry insiders did their best to lobby and try to make digital assets seem less of a threat. Now, the crypto industry is growing by the day. Banks that don't adopt crypto in some way or the other risk being left behind.
There is already a significant push from the banking sector to crypto. JPMorgan has launched its JPMCoin to make transfers more effective, and BNY Mellon, America's oldest bank, has also bought into Bitcoin. There is a significant chance that other top banking institutions will make Bitcoin plays one way or the other over the next few months or years.
In truth, Bitcoin and other cryptocurrencies are an existential threat to banks. However, the relationship between the banking and crypto sectors doesn't have to be an unfriendly one. Banks can embrace digital assets to grow their operations, and they should see significant benefits across the board.