Jan 20, 2023

Is Traditional Banking Under Threat from Cryptocurrency?

With the rising popularity of cryptocurrency, more and more online websites are starting to accept cryptocurrencies as a mode of payment. However, banks are still reluctant to accept these modern digital currencies. Most of the banks believe that the risks and downfalls associated with them outweigh their popular benefits. But the Office of the Comptroller of the Currency (OCC) and other regulatory agencies are trying the perspective of the banks towards cryptocurrencies. OCC is trying to give more regulatory guidance to the banks so that they can be more comfortable with cryptocurrencies.

What is cryptocurrency?

Cryptocurrencies are encrypted digital currencies and the common currencies are Bitcoin, Ethereum, Litecoin, Dogecoin, etc. The notable feature of cryptocurrencies is that they are decentralized while the traditional currencies are completely controlled by central governments or governmental authorities. Therefore, a third party will be involved in the transactions. As digital currencies are open-sourced, they rely on peer-to-peer networks and use codes to control them.

How does cryptocurrency work?

Cryptocurrencies store all the transactions on a digital ledger and the ledger makes use of cryptographic techniques to make sure the accuracy of the records and that the identities of the owners are encrypted. The ledger also verifies the spendable balance of the digital wallets of the users and also checks if the owner is using money from their own wallets only.

Cryptocurrencies are created through a process called mining in which the miners will have to solve complex mathematical algorithms to verify a block and add it to a ledger. The miners get a reward in the form of cryptocurrencies for successful mining.

What is cryptocurrencies’ interference with the banks?

Cryptocurrencies have revolutionized the way people carry out their business and transactions. The major shift is that people will not have to rely on a bank for financial assistance. Thus, peer-to-peer networks are providing financial support to people who may be denied by banks.

Many experts find cryptocurrencies to be a threat to traditional banks. Several experts believe that these digital assets have the potential to change the financial and economic sectors across the world. If the banks do not consider the shifting customer preferences and behaviors, they will have to face a threat from cryptocurrencies. However, the volatile nature of the cryptocurrencies, the chances for them to be used for illegal activities, as well as the comparatively lower market status are the current issues they face.

Traditional banks are well aware of the changing pattern in the current financial sector and the drifting customer nature. As many people are eagerly waiting for the wide adoption of cryptocurrencies, banks are a bit confused about their future.

What can banks do?

Analysts and experts suggest that to overcome the current threat, traditional banks must offer real-time services like that of cryptocurrencies to the customers as that is what most people are looking forward to from these digital currencies. Areas like digital services, fee structure, and customer service have to be given special attention. If they fail to upgrade themselves, there are high chances for them to be left behind.