Why Crypto-Banking will Overtake Traditional Banking
Different groups of individuals are drawn to cryptocurrencies for various reasons. Their censorship resistant nature, as well as the non-inflationary nature of truly decentralized cryptocurrencies, have led to their embrace by many. The absence of these features in the traditional banking sector have made truly decentralized cryptocurrencies even more popular and the majority of 2017 was spent pondering the how blockchain and cryptocurrency would upend the traditional banking sector.
Central banks preside over inflationary fiat currencies, and largely operate in clouds of secrecy. Even worse is the fact that banks, which are often the cause of economic downturn in many countries, tend to receive government initiated bailouts at the expense of taxpayers when in crisis but in times of economic prosperity they keep the profits for themselves. As the popular saying goes, they “privatize profits and nationalize losses.”
Banks have long been considered the safest place to store funds as clients get to protect their funds from theft while earning some interest as well. Central banks also offer varying forms of deposit insurance to safeguard depositors’ funds. However, in recent times, there have been concerns with regards to the safety of banks as places to keep funds.
Key tools of the banking system like fractional reserve banking and deposit insurance are often criticized for being unfair at best and fraudulent at worst. Fractional reserve banking, which is at the core of the existing banking system virtually creates new money out of thin air and often depletes the purchasing power of currencies. Central banks guaranteeing deposits also tends to incentivize risky behavior as well as malpractices by banks.
Analyzing the recurring collapse of banks en masse in various countries clearly shows cracks in the existing financial system and the majority of such cases throughout history have been caused by poor governance on the part of banks and poor monetary policies and regulatory oversight by central banks. The Cypriot financial crisis of 2013, the Greek debt crisis and hyperinflation in Zimbabwe and Venezuela are relatively recent examples of situations in which depositors found themselves wanting and became aware of the illusion ‘security’ that one believes comes from central banks guaranteeing deposits.
Consumers, as well as the general public, suffer the most in the dire economic conditions caused by the repeated failures of the banking sector. Additionally, they almost always bear the cost of reconstructing and reviving financial systems. It is therefore not surprising that individuals are beginning to notice the problems with the traditional banking sector. This phenomenon, coupled with the emergence of quality crypto-banking products could lead to the growth of crypto-banking in the future.
Transparency is Key
The lack of transparency in the traditional banking sector can engender recurring malpractice. For instance, prior to the collapse of the U.S. housing market and the following global economic crisis, a complete lack of transparency in the market prevented market participants from knowing that their funds were at risk. The true state of the housing market only became known when it was already too late.
Unsurprisingly, a number of key players in the traditional banking sector believe transparency is key when it comes to financial stability. During a 2011 speech delivered at the London School of Economics, American economist and former Vice Chairman of the Board of Governors of the U.S. Federal Reserve, Donald Kohn, explained how more transparency in the banking sector could lead to financial stability.
“Although better market discipline may not be sufficient for financial stability, it is essential, and better transparency is a necessary condition for better market discipline.” - Donald Kohn.
Regulations are Good but Transparent Systems would be Better
Improvements that address the issues revolving transparency could start by better educating stakeholders as well as enforcing greater government oversight on the enforcement of existing disclosure policies and regulations. Such steps would go a long way in bringing about more transparency in the banking sector.
However, the concept of crypto-banking as an alternative to traditional banking holds promise due to the fact that products offered by the crypto-banking sector are built on systems that are inherently transparent. The permissionless blockchains on which crypto-banking are based were designed to be open and there is no need for extra regulation as transactions on permissionless blockchains are visible to all. Hence, auditing and checking for malpractice can be done in real-time by any curious stakeholder. The point is that building financial products on a transparent system is more effective than enforcing policies formulated to ensure more transparency in the traditional system.
Security is more than just a Password and 2FA
Cryptocurrency influencers such as Peter Todd and Jackson Palmer often stress on the importance of financial sovereignty and having control of private keys to one’s cryptocurrency. The common saying is “not your keys, not your bitcoins.” this serves as a reminder to cryptocurrency holders that funds kept with third-party businesses are not safe and can be lost due to theft or fraud or seizure.
Unfortunately, with traditional banks, it's impossible to have full control of one’s bank account since funds can easily be frozen or seized at any time. There are real-world examples of ordinary citizens having their life savings frozen based on mere suspicions. For people who understand the importance of financial sovereignty, this is a major drawback of the traditional banking sector.
Conversely, decentralized crypto banking solutions allow users to maintain control over their digital assets while enjoying services that previously required entrusting funds with third-party businesses. This is made possible through the use of smart contracts on inbuilt services in in-house ecosystems. The Light in-house ecosystem, for instance, keeps users in control by hosting inbuilt banking services such as a payment system and exchange.
In order to provide customers with internet banking services, almost all banks today have websites and mobile apps for their customers’ use. It has, however, been found out that majority of these apps expose users to potential hacks and theft of funds and personal data. A recent study by AppKnox, a mobile app security company, revealed that about 85% of the internet banking apps used in the Asia Pacific region did not meet basic security standards.
During the study, ethical hackers succeeded in circumventing two-factor authorization and were also successful in gaining access to one time passwords for setting up accounts on some of the apps that were tested. It was also possible to make payments without actually spending funds on some of the wallets.
The release of Firefox 51.0 and Google Chrome a year ago, exposed several banks who were running unsecured websites. Santander, Diamond Bank, and Eagle Bank were are a few of the banks with poor web security.
Reports like the ones stated above show that the institutions charged with safeguarding funds of customers are not in any way 100% safe. Apart from the potential loss of funds, customers’ personal data is also exposed. These problems can be avoided by using decentralized crypto banking solutions using blockchain technology to provide secure networks.
Blockchain and Crypto are a Redi-Made fix
Apart from being secure and open, truly decentralized blockchain based systems have other advantages over the traditional banking system.
Whereas it takes days to transfer money via the SWIFT payment network in the traditional banking system, blockchains can facilitate almost instant transactions.
The minimal transaction cost associated with cryptocurrencies is another reason crypto-banking is on the rise. Improvements on blockchain technology like the Lightning network have led to increasingly small and insignificant transaction fees.
Albeit being set up to act as trusted third parties in the financial system, banks are currently more of a necessary evil as customers have learned through experience not to trust the financial institutions. New banking solutions like Revolut, Polybius, and FOTON, on the other hand, are enabling participants in the financial system to transact on more secure platforms and networks while keeping fees very low. There is no short supply of cryptocurrency projects with the goal of creating the banks of the future. Amongst the notable creators of truly decentralized banking solutions are Polybius, FOTON, Crypterium, ZODIAQ, and Mycryptobank.
The products the various entities build range from a few tools that enable individuals to control their funds to complete ecosystems of platforms, applications, and businesses.
While some projects focus on a couple of functions like transaction speed and absolute custody of funds, others provide comprehensive ecosystems where businesses can experiment with tackling the problems that plague the banking sector. Other technologies like artificial intelligence (AI) and the Internet of Technologies (IoT) are used in conjunction with blockchain for enhanced products. Polybius, for instance, allows users to control their finances using its transparent and fast platform for managing multiple currencies.
Crypto-Banking could Bridge Fiat to Crypto and Vice Versa
In a slightly different fashion, Crypterium uses blockchain technology to provide banking services tailored to cryptocurrency users. The difference between this type of crypto-banking and that of conventional banks is the speed and security of the network. Additionally, it bridges the gap between the crypto and fiat currency worlds by facilitating instant exchanges and payments with both fiat and cryptocurrencies.
These all-encompassing ecosystems and platforms cater to the needs of financial institutions, small to medium size businesses and individuals. The capacity of blockchain products to integrate into a client’s pre-existing software infrastructure allows for the seamless grafting of client applications to new custody, exchange and settlement solutions. For instance, a project called ZODIAQ provides a crypto bank that enables transfers between cryptocurrency wallets and bank accounts. To cover all the financial needs of clients, the bank has a hedge fund, cryptocurrency exchange, and a payments system. Additionally, the exchange and payment system allow clients to use their crypto assets for payments or exchange them for a range of digital assets and fiat currencies.
By utilizing blockchain smart contracts, crypto-banks like FOTON provide banking, exchange and payment functions on a single decentralized platform. Essentially, what consumers want from their banks is a one-stop-shop for all their banking needs. Crypto and blockchain-based banks could save users money as there are fewer if any commissions that would be required for each of the services.
In 2019, banks will need to go beyond the standard set of subpar services that they provide account holders. Rather than returning to the drawing board to manufacture new regulations and oversight watchdogs, the use of digital assets, smart contracts, and blockchain technology could provide solutions to many of the problems plaguing the traditional banking sector. The secure, transparent, and trustless nature of blockchains could create a banking system that is attractive to clients. Failure to do such could lead account holders dissatisfied with traditional banks to become loyal patrons at the growing number of new crypto-banks. If traditional banks desire to retain their hegemony over the financial system, they will need to embrace new technologies that will provide an efficient, secure, and transparent financial for all users.