Cryptocurrency has the potential to completely change how
our economy functions -- and it’s already doing it. Many
countries have either allowed or fully embraced
cryptocurrencies like Bitcoin , the market cap for multiple
cryptocurrencies has exceeded $1 billion, and public regard
for cryptocurrencies is at an all-time high (and climbing
higher).
That means the core institutions of our economy (i.e.,
banks) will need to evolve if they’re going to thrive, or
even survive, when crypto begins to take over.
Why cryptocurrency is a threat and ways banks
must transform to thrive in an era of
cryptocurrency
On the surface, crypto may not seem like a threat to banks
and other financial institutions, but it poses the potential
for disruption in several key ways:
Currency safekeeping
One of banks’ primary responsibilities is to store your
money and keep it safe. When almost all currency was
tangible and printed, this made perfect sense; you could
resist thievery and ensure a decent interest rate return by
keeping your money in a bank. But, in a world where most
currency is digital, recorded in a public ledger to ensure
transaction legitimacy, and kept secure with cryptographic
hashes, this function may no longer be as important.
Exchange oversight
Banks also have historically had a monopoly on most forms
of financial transaction. You couldn’t use a debit card or
write a check without a checking account, nor could you
open a credit card or commit a wire transfer. In a crypto-
focused world, all these transactions can be handled by
individual users (or networks of them) thanks to the
decentralization inherent in the system.
Fee-free usage
If you’ve used a bank, you’ve probably been forced to pay
excessive fees, such as overdraft fees, for the luxury of
using the system. Whether it’s a monthly rate or a penalty
for using the system incorrectly, in one way or another,
you’ll pay to keep your money safe. In a world where users
can handle their own storage and transactions, transaction
fees can be ridiculously low and fees would be non-
existent.
Banks also have a monopoly on conversion between
international currencies, and they charge a premium for
the service. If you want to exchange U.S. dollars for
Japanese Yen, for example, you’ll need to pay a couple
percentage points, or a few dollars (whichever is higher)
for the privilege. If customers could use a single, agnostic
digital currency for all their purchasing needs, this
requirement would all but disappear.
Convenience and accessibility
ATMs are available in most heavily populated areas, but
banks can still be an inconvenience. Cryptocurrency can be
accessed at almost any time, and nearly all transactions can
take place without the assistance of a human teller.
Public trust
Since the 2008 financial crisis (and in some circles, from
some time before), banks have had a public trust
problem working against them. Consumers see banks and
the people who run them as inherently greedy, broken or
in some cases, deceitful. Using crypto serves as a viable
alternative that doesn’t require putting your full trust in
any one person or any one institution.
Banks’ key advantages
That said, banks aren’t completely out of the running now
that crypto is emerging as a semi-viable alternative for
these products. In fact, banks still hold these key strengths:
Borrowing and financing
If you need to borrow money, you might be able to find a
private investor or lender to provide the funds via Bitcoin,
but it’s much more reliable and straightforward to contact
a bank. The mortgage industry, and lines of credit for
businesses, will still need to depend on banks for the
foreseeable future, even if cryptocurrency develops.
Underwriting and decision-making
Some banks specialize in underwriting, and helping
businesses make important decisions (such as following
through with a merger or acquisition). Because these
functions exist outside the core processes of currency
storage and exchange, they can’t easily be replaced in a
crypto-centric economy.
Economic stability
Banks also play a very important role in maintaining
economic stability . They keep currency liquid, keep prices
relatively stable and in some cases, have the power to
increase consumer confidence and consumer spending by
making money easier to borrow. Currently, cryptocurrency
prices are much more volatile, though with enough time
and enough adoption, this hurdle could be overcome.
Legacy systems and slow progression
Many consumers are reluctant to adopt crypto in any form,
either because they don’t understand it, or because they
don’t want to change the system they’re already used to.
This gives banks a key advantage -- more time they can use
to adapt slowly, and more consumer confidence, even in the
face of a massive threat.
How banks could evolve
If banks want to survive, they need to keep hold of their
distinct advantages, and make up for their inherent
weaknesses with the following potential transformations:
Monitoring, understanding and acceptance
First and foremost, banks need to take cryptocurrency
more seriously. This is a viable threat to an entire industry,
in some ways more than others, and it deserves high-level
attention. At best, banks can watch for crypto developments
and try to learn from the changes it brings to evolve their
own infrastructure. At worst, they’ll know what they’re up
against, and may be able to compensate for their new
weaknesses.
The addition of blockchain products
If banks have the time and resources, they should focus on
hiring more blockchain developers, and investing in new
blockchain-centric products. Some banks are already doing
this, looking for a way to streamline consumer transactions,
or in some cases, launch a cryptocurrency on their own.
This falls into the “if you can’t beat ‘em, join ‘em” category,
but is still a useful way to guard against the crypto threat.
Drastic reductions in fees and exchange rates
Even consumers who are divided about the long-term
stability or reliability of cryptocurrency will be attracted to
the lack of egregious fees in the digital currency system. If
banks want to remain as a viable alternative, they’ll need to
revisit their fee structures, eliminating or drastically
reducing the fees they charge for basic services. This will,
no doubt, happen gradually.
Specialization and downsizing
Banks may also find themselves unable to compete with
crypto in all areas, so instead of launching a massive
overhaul to their core services, they could shift to start
specializing in areas that can’t easily be replaced by a
crypto-based transaction system. For example, they could
serve business clients exclusively with underwriting and
analysis, or prioritize their borrowing and lending
products. They could even start shutting down areas of the
business that are no longer relevant or profitable.
More personalized products and guidance
Cryptocurrency offers consumers the ability to handle their
own money management and financial transactions, but
not all consumers will be ready for those responsibilities.
Banks could also shift to address these customers
specifically, offering personalized selections of products to
build a financially stable life or offering one-on-one
guidance to customers as a value-added service. Some
customers would be more than willing to pay extra fees or
a monthly rate in exchange for ongoing financial
advice and/or asset management.
Banks may never go completely obsolete , even in the wake
of exceptional cryptocurrency adoption worldwide, but they
will take a massive economic hit if they don’t start to
transform soon. With pressure from consumers, regulators,
and economists already beginning to converge, it’s only a
matter of time before we start to see these changes
manifesting in our most important financial institutions.
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