Banks can’t afford to keep ignoring cryptocurrencies
As crypto continues to gain traction, with spending portals springing up all over the world, central banks are looking for alternatives.
Increasingly, retail banking customers and institutional investors are expressing interest in using crypto payments. This is because they are more democratic and accessible than traditional banks, which have more requirements attached to them.
The technology that underpins cryptocurrencies, blockchain, is also seeing an increase in engagement due to its transparent and permissionless nature.
In turn, this means that more people will be able to access the entire decentralized finance (DeFi) ecosystem without government permission.
This is important for developing countries looking to take their populations to the next financial level as internet and mobile payments grow in popularity.
Therefore, governments and banks will have to catch up because they can no longer afford to ignore what is happening.
For it to be a success, however, there needs to be a push for blockchain and a drive to bring digital infrastructure to everyone.
Internet changes the bank
Emerging financial technologies such as artificial intelligence (AI), blockchain, Internet of Things (IoT) and quantum computing are key to ensuring the fair and safe adoption of digital assets.
Pushing the concept of blockchain further, early developers and adopters have a lot of knowledge to assess its risks and potential.
Technology is already transforming many industries: e-commerce, real estate, gaming, art, fashion and sports, to name a few. It is now up to banks and financial institutions to adopt it or be replaced by digitized populations.
In the same way that the internet is changing conventional banking processes, blockchain technology and DeFi are also transforming the financial industry.
Without the use of the Internet, conventional banking takes time. Clearing checks is taxing, transactions move at a slower pace, some banking services are only available during business hours, and administrators have a lot more work to do.
The Internet removes these problems. It does this by giving users the information they need at the touch of a button. More importantly, it puts them back in control.
This is exactly what blockchain technology and cryptography do. By open the financial systemmore people around the world can access what so many others take for granted.
It is for this reason that a joint venture between the crypto world and the bank presents the best alternative.
The rise of CBDCs
Central bank digital currencies (CBDCs) are an area that banks are focusing their attention on. These are gradually becoming a reality.
The Bank for International Settlements (BIS) has fully supported the development of CBDCs. It states that finances need to be updated so that Big Tech does not take control of the money.
The Bahamas were the first to launch a CBDC. While China has a number of tries in place to launch his own. Yet, as other countries experiment with CBDCs, the European Central Bank (ECB) warns that there is a “stability risk” if banks do not offer digital currencies.
With so many crypto-native startups and companies, it is possible to skip an entire infrastructure while allowing these companies to launch the new ecosystem.
Ultimately, however, if banks don’t start soon, they will be overtaken and surpassed by existing fintech and crypto companies that offer mobile banking options.
Overwhelmed and overperformed
Yet even if the banks are lagging behind, they have the favor of the government. In Europe, for example, ongoing regulations regarding crypto are draconian. The same could be said for the United States in early 2021 when Trump administration.
Essentially, in order to regulate crypto for the public, regulators are matching their restrictions to those that banks currently face. Additionally, if regulations oppose innovation and affect crypto companies, banks have a chance to catch up.
Bitcoin is seeing progress and widespread adoption. However, its original promise as digital cash is not being fulfilled as users prefer it as a store of value. Elsewhere, corporations today, and perhaps central banks in the future, value it more as an investment asset to hedge inflation.
Ethereum is the next logical candidate for decentralized payments. However, network congestion, along with its gas charges, is becoming a high barrier to entry for many users, especially in developing countries.
Layer two solutions address this issue, along with a series of protocol upgrades that will collide in Ethereum 2.0.
Benefits of crypto and DeFi payments
Open, decentralized and transparent are some of the advantages of DeFi over traditional finance.
As the entire balance sheet is available in DeFi, it is clearer for users, lenders and borrowers, as well as future users looking for a financial institution. There is also the possibility of making the balance sheet public every day, like an open audit.
Another advantage is on-chain transactions. It is not a custodian, so all funds are in the possession of the user. Added to this is the fact that on-chain assets are more versatile for trading and use in DeFi services.
Moreover, the latest data suggests that the number of people with an internet connection was nearly four billion in 2019. This means that more than half of the world’s population could soon be accessing crypto wallets and digital currencies.
Finally, different from traditional finance, DeFi has five qualities that set it apart: autonomous, permissionless, non-custodial, transparent and trustless.
An example is the partnership between Yearn. finance, a DeFi project, and CREAM, a lending protocol, which saw the two come together to launch Cream V2.
As part of the merger, Protocols launched the Iron Bank. It is a protocol-to-protocol lending system for the DeFi space. What makes it different is that it’s fast. Loans can be contracted without the establishment of collateral. As a result, banks would also benefit as it would bring fewer intermediaries to the table.
To look forward
Even though banks may try to ignore it, cryptocurrencies and DeFi are here to stay. They can no longer afford to ignore them.
If successful, the ecosystem will take a significant chunk of power from centralized organizations, putting it back into the hands of the people. Since 2008, trust in executives has declined as consumers turn to alternatives.
Collaboration between the crypto and banking industries is key to driving innovation. It also helps reduce overhead, increase revenue, and ultimately create better products for end users.
With the help of DeFi, the financial system can be taken to the next level. This will help collect the two billion unbanked people global.
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