Crypto diehards will tell you that Bitcoin is going to destroy the banks. Banks will say the crypto frenzy is the last bubble ready to burst.
Both are wrong.
They shouldn’t be warring factions, but proper allies. The rise of cryptocurrency signals a fundamental market desire for a different kind of frictionless funding. Instead of trying to fight the crypto tide, banks should embrace the changing landscape to modernize and be ready for the future.
Cryptocurrency, which primarily relies on blockchain engineers, is a unique and highly innovative technology with enormous potential for decentralization and building trust in a whole new way. On the other hand, banks have the scale, infrastructure, and consumer trust to bring crypto vision to the mainstream. Cryptocurrencies will not destroy banks; they will accelerate the bank’s modernization journey.
Banks are no longer suited to their mission. Today, everything is expected to be simpler, faster, more efficient; Amazon packages arrive within 24 hours and the full range of entertainment is available to everyone, all the time. In a 10-second attention span world we live in, customers still have to wait three to five business days for funds to clear and pay exorbitant fees for this slow service.
Ultimately, it is the consumer who suffers and pays for inefficiencies through costly and slow transactions or, more generally, by being denied access to financial services altogether. Even today, we see that without a tax return, permanent address, or access to a physical branch, getting credit or even opening a bank account remains a challenge for millions of people. Current statistics show this and this number increases exponentially when we take a global view of developing countries.
Cryptocurrencies are still considered the Wild West, with new types of cryptocurrencies or tokens, from the real ones to the same, rising and burning every day, leaving a trail of amateur investors in their wake. A cryptocurrency based on Netflix Squid Game series soared over 310,000% before crashing while the meme-inspired Shiba Inu cryptocurrency continues to experience 750,000% price swings.
Cryptocurrencies like Bitcoin are also a volatile asset that can be subject to huge swings in value, depending on public announcements from figures like Elon Musk. Additionally, there are concerns that crypto wallets are easily hacked and how cryptocurrencies have been used to facilitate crime and finance terrorism.
Yet many fears are based on a misconception. While volatility is to be expected in infant industries, the underlying technology is actually more secure and transparent than many traditional banking systems. The main currency, Bitcoin, for example, has never been hacked. On the other hand, banks like Capital One have lost sensitive information of more than 100 million Americans in a data breach.
Regardless of the actual strength of the blockchain, cryptocurrencies still suffer from a reputational problem. Older generations are more likely to trust household banking names and are less likely to adopt cryptos. When supported by their trusted bank, a whole new demographic can benefit from decentralized finance and the promise it holds.
Early adopters of Bitcoin want banks to have no role in tomorrow’s financial systems. This is perhaps more of an ideological point of view than what is realistic. Remember that a number of these cryptocurrencies have grown as communities and as white papers aimed at democratizing money. Ultimately, most people care about transaction speeds, ease of use, low transfer costs, and the security of their money, digital or otherwise. A convergence of banks and cryptocurrencies can offer this, regardless of the mechanisms operating under the hood.
To achieve this, banks and crypto providers must first and foremost work together, and at the moment this is not happening. Everything about cryptocurrencies is based on cutting-edge technology. After years of consolidation, the technology that underpins traditional banks remains creaky and outdated.
Yet the main strength of banks lies in their reputation and their ability to provide financial services at scale.
By combining the two, the consumer and the economy as a whole can benefit from the experience of financial institutions, as well as innovations from a growing decentralized sphere.
Such a partnership has the potential to be a game-changer for the US and global economy. The most recent crisis in Afghanistan shows the real need for many to be able to send money abroad, instantly and at no cost. Yet for those who don’t trust cryptocurrencies themselves, or who don’t know how to buy or send them, it remains impossible.
The United States is the largest source of remittances in the world; in 2017, a total of 148 billion dollars was sent from the United States
Regulators play a crucial role in this transition. Even crypto leaders are advocating for a tighter market because they know that only through regulation can cryptocurrency be validated. If we really want the value of decentralized finance to serve our people, having the right regulatory safeguards in place is key to building that bridge.
Globally, we see regulators helping to close the gap, most recently with Thailand’s Siam Commercial Bank is buying a majority stake in digital asset exchange Bitkub for $535 million. We have seen the benefits fintech has brought to the banking industry. The model has evolved from competition to collaboration for the benefit of incumbent banks, startups and especially the consumer.
The difference between fintech and blockchain is that blockchain is not just a new version of an old game. It is a generation-defining technology that will not only transform finance, but also people. contracts, online trust and the nature of ownership. The world will embrace this technology, so will the banks.
In theory, cryptocurrencies solve many problems rooted in the old financial system. But it’s only when crypto experts build the partnership model and partner with banks that it makes it practical and real.
David Donovan is the Executive Vice President of Publicis Sapientand expert in decentralized finance.
The opinions expressed in this article are those of the author.