We’ve reached a point in conversations around making this time the era of cryptocurrency. It’s beginning to feel natural to think that crypto could one day replace standard currency. But, what if it could overthrow our entire financial system, including banks?
The financial industry isn’t seen in a favorable light. Consumers hold very little trust in banks and the financial sector. Many witnessed the greed and obfuscation that led to the 2008 economic crisis. The public may be open to replacing banks with a better system. But, could that better system really lead to the era of cryptocurrency?
The Functions of Banks
Let’s start with a primer on what functions banks are responsible for handling even in the era of cryptocurrency:
- Currency storage and security. Banks hold your checking and savings accounts. They’re chiefly used as repositories for your currency when it’s not in use. Because most are FDIC insured, you can rest easy knowing that money is safe.
- Transaction management and recordkeeping. Your bank takes charge of managing your transactions, whether it’s processing checks and debit card activity or transferring between accounts. They also keep detailed logs of all these transactions.
- Conversion and exchange. You can withdraw money from your bank in almost any form. This includes cash from an ATM. At some banks, you may also be able to exchange one type of currency for another.
- Borrowing and financing. Banks are responsible for facilitating borrowing, financing, and other financial products. Without banks, you wouldn’t be able to get a mortgage for your house or a line of credit for your business.
- Underwriting and supervision. Investment banks serve functions distinct from those of commercial banks. They aid in underwriting. Also, they may help businesses make important decisions like whether to move forward with a merger or acquisition.
- Financial stability. Central banks are typically government entities that oversee interest rates. Therefore, they attempt to control inflation. Also, central banks carefully control how much currency is printed and distributed at any given time.
These all seem like valuable services. Why would we want to replace these functions in the first place in this era of cryptocurrency?
- Bank fees. These fees range from annoying to egregious. Withdrawing money from another bank’s ATM might only cost you a dollar. However, you might pay $10 a month to keep your checking account open. Aside from that, you could pay $25 or more for an overdraft or pay $20 for overdraft protection. The truth is, we could do without many of these fees. If eliminated, the average person could save hundreds to thousands of dollars each year.
- The banking system. It can be a hassle. The advent of online banking and the prevalence of ATMs makes it easier on consumers. Yet, you may still run into issues with transferring funds between banks and processing similar transactions.
- Personal direction. Banks are usually enormous corporate entities. However, they’re controlled by people. People make decisions about who to lend to, how to invest money, and how to control the flow of currency. Since people are often driven by greed and selfishness, that makes the system dangerous.
What Cryptocurrency Can Replace
In an era of cryptocurrency, here’s what it might replace:
- Storage and security. There are many ways to store your cryptocurrency with “wallets” available on desktop computers, thumb drives, mobile devices, and online services (which might carry fees similar to banks). While cryptocurrency isn’t federally insured, the way your bank account is, it is highly secure. This is as long as you keep track of your passwords and don’t let your hardware fall into the wrong hands.
- Transactional security. Cryptocurrency relies on a distributed ledger. This publicly keeps track of all transactions to eliminate the possibility of transactional fraud. It uses encryption standards that keep all transactions anonymous at the same time. This system would preclude the need for a checking account, at least hypothetically. Also, it would ensure that customers could safely exchange their currency for goods and services.
- Exchange (to an extent). Crypto can also be readily exchanged for practically any other type of currency at almost any time. As the reach of cryptocurrency improves, these capabilities will expand. This will serve our population with more types of exchanges.
What Cryptocurrency Can’t Replace
Even in this era of cryptocurrency, there may be some banking functions that it just isn’t ready to replace:
- Important financial products. There’s nothing inherent in cryptocurrency that allows for things like car loans, mortgages, or business lines of credit. These are important financial products that keep our economy moving. For the foreseeable future, we’ll still need banks to pick up the slack here.
- Investment banking. Cryptocurrencies may also be unable to replace investment banking. That’s because there’s nothing in the system to aid in underwriting or in overseeing acquisitions. For that, we’ll still require human experts.
- Central bank functions. Cryptocurrency can’t replicate many of the important functions of a central bank though that may be part of its appeal. Cryptocurrency typically circulates itself through a fixed scale of crypto distributions. Yet, there’s no one to oversee interest rates or control inflation. This could be a weakness in the long term.
A World Without Banks
Let’s assume for a moment that cryptocurrency is able to gradually replace the function of banks in our world. What would the world then look like? What kind of consequences would unfold?
- Financial instability. The early stages of any cryptocurrency would be manageable upon entry. As it matures, it could be vulnerable to extreme volatility. Inflation could run rampant or valuation could fluctuate wildly from high to low. This is especially true as investors start exchanging with other currencies in response to their uncertainty.
- P2P lending. Without banks to offer financial products, P2P lending could become even more popular. It could be commonplace to seek loans from friends, family members, or even strangers. And, this could happen with interest rates at or lower typical rates from banks. If you’re flush with cash, you could even use these loans as investment opportunities for yourself, all but guaranteeing a percentage return on your capital investment.
- Limited resources. We may also miss banks as a source of information, whether it’s helping us understand the peculiarities of a loan or analyzing the risks of a company merger. Still, with ample resources available online and the steady rise of artificially intelligent digital assistants, this function may be replaceable in the distant future.
Can Banks Transform in the Era of Cryptocurrency?
At this point, it should be clear that cryptocurrencies do pose a threat to banks. They may not be able to replace all functions or do so within the next several years. However, they can certainly undermine the vast majority of the financial industry’s purpose.
Yet, all hope is not lost for the financial industry even in the era of cryptocurrency. There is plenty of time to change in response to this threat. Some banks like Bank of America are already brainstorming ways to evolve. If banks can retool their core products, restructure their fees, and start adopting more services conducive to a world driven by cryptocurrency, they could easily thrive in a world where crypto is the norm.