Cryptocurrencies: Future of Banks

Governments and central banks across the globe are folding up their sleeves to prepare to dive into the vast world of digital money and cryptos.
Cryptocurrencies: Future of Banks
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Of late Cryptocurrency is what everyone has been gossiping about. Banks, economies, and markets, although they are currently sheltered from turmoil, will need to be vigilant to access digital technology. The eve of the pestilence in 2019 changed a lot in the way of human life.

The ever-increasing emphasis on bodily distancing and contactlessness has impacted every facet of life; finance and currency being no different. Although, the concept of a digital currency can be traced back to 1983—when David Chaum came up with a research paper about digital currency—nothing has lead to the fame of the digital doughs as massively as the Bitcoin boom of 2017 and, recently, the covid plague.

In Dec 2017, Bitcoin grew in value by a whopping 2000%. Today, Bitcoin possesses a market capitalization of over 990 billion dollars. With this and increasing worldwide use, digital currencies have become all the most influential and un-ignorable. Today, governments and central banks across the globe are folding up their sleeves to prepare to dive into the vast world of digital money and cryptos. That evolving financial system goes hand in hand with both good and bad. Although, it is unlikely that the digital currency system takes over the fiat monetary system in immediate future—due to security and other issues, yet, governments and central banks cannot ignore the same. Ultimately, digitisation will be the future of money. Banks will also have to evolve, adapt and embrace the technology of digital currencies such as the Blockchain. Economies will have to accomplish exchange in cryptos.

A digital currency is any currency, money, money-like property which is predominantly arranged, stocked or bartered on digital computer networks, particularly over the internet. The most common examples are Bitcoin and Ethereum. Digital money is characterised by the abstract form, anonymity, cost-effectiveness concerning handling and distribution, decentralisation and deregulation. Blockchain software lies at the gumption of electronic wealth. It is a wider concept than such currencies. A Blockchain can be used to develop digital art and a whole bunch of other things. For example, Ethereum does not talk only about money; it talks about decentralised finance, internet infrastructure. Ejaz Ayoub, an eminent economic pundit, in this connection says, “Blockchain is a bigger thing than cryptocurrency. We can use a Blockchain for developing medical records, digital art, and handicrafts and so on.” Electronic money has not been given any approval by the governments and central banks. Yet, no government, no central bank and no individual can afford to ignore the concept.

What led to the emergence of digital money?

The traditional mainstream fiat monetary mechanism has some inherent shortcomings. It is inflationary. Central banks create money out of thin air. This leads to a bubble trap that can detonate anytime. The same thing happened in 2008. The financial meltdown of 2008 and the printing of dollars eroded the value of the existing fiat money in the system. The United States printed dollars and bailed out the sunken banks. Fiat money is coupled with income equality. Cryptocurrency came in the next year, 2009. It has addressed these deficiencies in the traditional process. Gradually, the time came when many people around the globe got impressed by the way digital money contested fiat money and the sovereign governments across the map. Today, the digital currency serves as an asset, a store of value and a hedge.

What insulates banks from the digital currency boom?

At the moment, banks are invulnerable to the change. This is because governments across the globe have the power to legalise an alternative currency and induce folk faith over them. Moreover, security issues and the lack of social cohesion in the face of digital currency confer some immunity to banks. Apart from this, the threats of money laundering, theft, hacking, volatility, speculation, counterfeit currency, cyber-attacks have been posing grave challenges to the captains at the helm of the affairs of digital money. Although, the security aspects of such currencies are being vigorously beefed up—which can be seen in the constriction of digital frauds to 57% amounting to as low as $1.9 billion recently—yet, the public fidelity is still far away. In addition to that, as long as governments accept fiat money as taxes, banks will be in the business. People would need the traditional money to pay taxes. What’s more, if you want to buy Crypto-currency, you always need fiat money. For example, on WazirX App, if you want to invest (buy, sell and trade) in digital currencies viz Bitcoin, Crypto, Ethereum, Ripple, Litecoin, etc, you will have to use your traditional account balance and purchase the currencies through Internet Banking, UPI and so on.

How is the world evolving toward the digital currency system?

India launched the Unified Payment Interface (UPI) in 2016 to boost cashless transactions. In 2016, 24 countries had invested $1.4 billion in digital cash. Hong Kong’s Octopus card in 1997, London Transport’s Oyster card, Facebook’s Diem—previously known as Libra— and the like are solid steps towards the digitisation of currencies. The recent $1.5 billion purchase of Bitcoin by Tesla has given a head start to the universe of digital capital. All these observations point towards a fact that digitisation is the future of money. This is endorsed by experts around the kingdom. Christian Lagarde, president of the European Central bank recently emphasised that Euro must be fit for the digital age.
The world is looking at the Central Bank Digital Currencies (CBDC) in future. It would be a world where digital money is issued by the central banks of the countries and all trade and sales and purchases are made via them. Money will be electronic—no notes and coins. Currently, about 80% of central banks in 66 countries—including 21 developed nations—are exploring the allotment of electronic currencies. Some countries like China—the first country to digitise its currency—have already started pilot programmes. China’s rollout of digital Yuan is in the offing next year coinciding with the Olympics. Bahamas’ official Sand Dollar is already in mass circulation. Janet Yellen, US Treasury Secretary, in this connection says, “Digital Dollar is worth looking at.” Likewise, Tao Chang, Deputy Managing Director at International Monetary Fund (IMF) explains, “The convenience and accessibility of digital currencies of central-bank-issued digital cash could enable substitution at a faster pace and larger scale.” India is not behind in recognising and relinquishing the importance of digital cash. Reserve Bank of India (RBI) looks at the Financial Inclusion avenues through digital currency. In 2020, the non-profit National Institute for Smart Governance (NISG) unveiled the Central Bank Digital Rupee on Blockchain—software that runs the cryptocurrencies like Bitcoin and Ethereum.
Having discussed how the digital currencies are gradually going to rule the roost, it is for the banks in our country to prepare to face the associated challenges and reap the opportune benefits. This way or that, Banks in India—and anywhere in the world—can not ignore the digital currency age that is fast approaching.

What do banks and economies have to think about?

Now when digital money is gaining rhythm, Banks and economies need to figure out how to adopt these abstract digital monetary systems. Since, ultimately, banks cannot escape the new order; they will have to develop their technology to be ready to run the suitable software. Banks need to be prepared to deal with multiple challenges and to seek answers to many questions. If banks do not switch to the new form of money, how are they going to stay relevant? How do banks safeguard themselves from the lobbying of the kings of digital money against banks and regulators? Banks have to think about how to process large volumes of transactions quickly, cost-effectively and with a competitive consensus. Making people believe in the new money and the privacy of their payments will be a terrific challenge. Digital money transactions happen over smartphones. Such phones need to have the required advanced software that runs virtual machines effortlessly. Not everybody possesses a phone like this, neither the expertise, especially in a country like India with more than 75% rural population. The ideal technology must be flexible, highly capable, responsive and lightweight. Practically, our banks have miles to go to achieve the same. Johann Palychata, Research Analyst at BNP Paribus, in this regard, says, “Banks will need to consider how to utilise the technology behind the cryptocurrency. If they don’t, there is a possibility they will become outdated and redundant.” The biggest fishes in the sea of digital money have been lobbying against banks, central banks and the system of fiat money. They advocate breaking the monopoly of central banks. They argue that fiat money is inflationary and manipulatable. Apart from this, electronic money would likely divert a major chunk of domestic and international commerce away from the traditional mechanism. Digital currencies would not replace the commerce trade entirely, but they would eat away a lot of it. This would concern banks. Banks are in the business of the businesses. Less number of businesses dealing in fiat money would mean reduced business figures of banks. With decentralised finance, peer to peer lending, banks may gradually become irrelevant, unless they change. Banks need to gear up to answer all these questions and come up with solutions.

Postscript: For now, commercial banks are stable vis-a-vis the digital currency boom. Banks enjoy the govt recognition of the fiat money system and the trust of the people in this traditional system of currency. This, however, like every old system is going to be replaced with a new one. On the flip side, there is an ample number of opportunities for banks. Banks can reach a huge number of people and there will be greater inclusion. The system of lending and borrowing will also go digital and therefore reduce footfall, paperwork and the associated costs. Banks may target the millennials—which form one of the biggest categories of the world population and are tech-savvy—and garner business through the new system of money. In short, when banks walk over the untrodden ways, newer doors of exposure, business and service may open up. Let us immerse ourselves in this sea and explore. The need is to upgrade our technologies and be prepared. For investors and individuals who wish to dive into the world of cryptos, study the market first, invest a small amount of money that you are ready to put at risk. This market is very volatile. Invest carefully.

(The author, an MBA, NET, IBPS, works in the Middle Mgmt of a reputed PSU Bank. views are personal.)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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