Are crypto and blockchain technology poised to replace traditional banking and finance systems?
And further, could crypto and blockchain technology pose a significant threat to central banks worldwide? The short answer is yes. Cryptocurrencies are an existential threat to central banks, and the response from national financial authorities thus far seems to be, “If you can’t beat them, join them.”
The simple answer to if decentralized finance could replace banking and traditional finance is a resounding yes. Crypto can easily replace fiat in all its uses as a store of value, medium of exchange, and unit of account. And decentralized blockchain-based systems can replace banking with faster transactions, higher levels of security, lower fees, and intelligent contracts. We can lend or take out a loan, raise capital for projects, and make payments already with DeFi. And it’s just getting started.
Many believe that we could replace banking and finance easily with a more efficient digital, decentralized economy. But will it happen? Banking and governments hold the most power in the world. It may be naive to think they will stand by as crypto and blockchain replace them. Taxes need to be paid, and the government needs its cut. At this point, nearly all world powers have considered releasing a digital version of their currency from their central bank — the main reason being to head off Bitcoin and crypto from gaining too much momentum.
The new reality tends to look like centralized authorities will be adopting crypto and blockchain solutions to avoid the risk of becoming extinct. Instead of a free, self-governing utopia, the future is taking shape to integrate traditional financial institutions and banks with blockchain technology. However, many central banks are confused about what they can bring. After all, they are antithetical to the original premise of Bitcoin, which was to provide a decentralized and private method of transacting.
Central bank digital currencies would need to provide most of the same benefits of crypto to stem the competition coming from DeFi systems. Central banks may need to let commercial banks fend for themselves, as users could transfer funds to be held in CBDC accounts — this would allow for lower fees with fewer middlemen between transactions.
“These factors will increase the competitive pressures on commercial banks. They face the risk of disintermediation,” Barron’s reported via Morgan Stanley.
Commercial banks and financial services must adapt to provide more value to their users. The fact is that as the public becomes more educated on crypto and decentralization, the more they see the benefits in the future of finance and the internet.
To avoid being replaced, the other course of action would be to ban crypto and blockchain completely, but many have doubts that this could happen. The public looks kindly on innovation, and massive companies like Microstrategy and PayPal have spearheaded a possibly irreversible adoption of digital currency.