The banking sector, consisting of central banks, commercial banks and financial institutions, has always been controlling monetary transactions and transfers. Any purchase you would have to make would need to go through a central authority that manages and processes transactions.
However, the scenery changed when cryptocurrency arrived and gained popularity at the beginning of the 2010s, bringing a new decentralised economy as opposed to the traditional centralised authority.
The dramatic introduction of blockchain transactions affected banks and rivalled them in financial markets, investment securities and means of payment. However, after 10 years of avoiding decentralisation, it seems that banks are showing tolerance toward cryptocurrencies.
Let’s have a look at the recent developments in the banking industry regarding cryptos and what the future looks like.
Centralisation Vs. Decentralisation
Banks and governments looked at cryptos as possible rivals and vied with them since day one, as they threatened the control and power that central authorities practice. Therefore, Bitcoin was hardly adopted and paying with cryptos was limited.
The volatility of cryptocurrencies was believed to impose a danger to the financial world that had just recovered from the 2008 crisis. Moreover, the deregulation of the decentralised economy was not something that governments preferred in light of the common practice of collecting users’ information for every bank account.
However, the growth of cryptocurrencies was inevitable as Bitcoin kept growing in value and more currencies and coins emerged.
Decentralisation is based on distributed power and shared control, allowing users to control their transactions and information. Additionally, crypto transactions do not require your personal data and do not disclose your information, which preserves personal privacy.
Web 3.0 use cases also emerged in conjunction with decentralisation, entailing the development of top-notch apps, virtual reality and augmented reality creations and digital assets on the blockchain.
This introduction, besides crypto investing opportunities like crypto staking and farming, created a whole decentralised ecosystem that grew over the years.
These developments urged some banks and governments to adapt and integrate some DeFi elements into their system, which we will explain.
Adopting Cryptocurrencies in Centralised Institutions
Developed countries were cautious with crypto trading and transacting, while developing economies reacted positively to Bitcoin and other coins.
El Salvador and the Central African Republic were the first two countries to adopt Bitcoin as a legal tender in 2021 in hopes of boosting their deteriorating economies. More developing and developed countries started at tentative steps.
In 2023, Ethereum ETF trading was approved by the Securities and Exchange Commission in the US, and several investment corporations are offering Ethereum ETFs like Bitwise and ProShares.
At the same time, top financial firms like Fidelity and BlackRock Investment have applied for Bitcoin spot ETF trading, which the SEC has not decided yet, and traders are only speculating on the chances of approval.
Shall this application get approved, it is expected to drive Bitcoin price higher with other major cryptocurrencies, besides increasing crypto integrations in banks.
Challenging Events in Crypto Integration
Despite the increasing tendency to adopt cryptocurrencies in centralised banks and financial institutions, financial events arise and hinder these efforts.
Since 2022, the Securities and Exchange Commission has started a powerful movement to enforce legal laws and regulate most cryptocurrencies, especially Bitcoin. This initiative was justified by the protection of trader’s and investor’s money and rights.
However, the crypto community strongly oppose this introduction because it fundamentally contradicts the notion of decentralised economies and cryptocurrencies.
If the bill goes through, it means regulating the price, trade and supply of Bitcoin, while cryptocurrencies essentially support the free flow of currencies and lack of centralised power.
Moreover, the collapse of the banking system in the US in the first quarter of 2023 created ambiguity in the scene. Silvergate Bank, Silicon Valley Bank and other commercial banks crashed due to asset mismanagement and poor planning.
Some of these banks were believed to be engaged in crypto trading, which caused confusion about whether banks are better off with or without cryptocurrencies.
Cryptocurrencies changed how people transact and trade in financial markets, and we started to hear terms like Bitcoin, blockchain and DeFi in governmental reports. After years of opposition, central and commercial banks started welcoming crypto trading and regulating major cryptos as legal trading instruments.
However, more contradictory events appeared on the horizon, making investors and policymakers think twice before immersing themselves in the decentralised economy.
It is too early yet to judge the crypto future in the banking system, but decentralised economies have come a long way within 10 years and are promising more developments and usability that we may see in the coming years.