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How will digital currencies change the traditional banking system?

Commercial banks are the link between people and their capital. But what will happen to them as crypto and digital currencies gradually eliminate the need for such intermediaries? Will banks, now the kings of capital, be dethroned?

Currencies banks crypto

At Exeno, the first e-commerce that accepts only cryptocurrency payments, we are closely following emerging payment trends. In the last few years, fintech companies and cryptocurrencies have been steadily expanding their payment market share. How will that affect the traditional banks? Let’s figure it out. 

The traditional functions of the banks 

The main functions of the banks are accepting deposits and granting loans. Initially, they functioned exclusively as gold storage but then the bankers realized that it was quite unlikely for all the deposit owners to withdraw their money simultaneously. Thus, to capitalise on this, banks started lending the stored money on a time-interest basis. Since deposit-taking and lending are complementary, this synergy has kept the banking system solid through the centuries.   

Consequently, banks have always been involved in the art of making money. To keep them in check, central banks regulate the financial system by setting interest rates for commercial banks, and increasing or decreasing the amount of money in circulation. They stabilise economies and strive to make the currencies reliable.  

Given their importance, how can these leading providers of financial services be challenged by digital currencies?  

New technologies are taking over the world of finance 

Nowadays, 90 per cent of the world’s money takes the form of digital deposits. This reality has opened the floodgates and permitted fintech companies to enter the fiscal game. And they have a chance of winning it. China is an impressive example: the local tech giants’ e-payment technologies, like Alibaba’s AliPay and Tencent’s WeChat Pay, have dominated the non-cash retail market. 

Those companies recognised and acted on online shoppers’ need for fast and secure payment options. The convenience they offer is affordable, too: commissions can be as low as 0.1 per cent per transaction, far less than those of traditional players.  

Due to the Covid-19 pandemic, the number of online purchases skyrocketed. In turn, payment systems have witnessed a historically high demand. To illustrate the financial impact, PayPal’s market value has risen to more than $310bn over the past year. 

The industry is constantly evolving, offering new and better solutions. We believe crypto is one of those improvements. Cryptocurrency has significant advantages over FIAT money, excelling in transaction speed, security, and affordability of commissions. Exeno, as the first online store accepting exclusively crypto payments, brings the benefits stemming from using digital coins directly to its customers. 

Extensive plans for digital currency adoption 

Cryptocurrencies and other digital payment systems are an increasingly popular alternative to traditional banking services. Aware of the magnitude of this change, banks are now eager to enter the world of innovative payment methods.  

Physical cash is gradually becoming obsolete. Recognising this, 90 per cent of central banks are now considering issuing a digital version of their currencies, so-called CDBCs, (Central Bank Digital Currencies). The first institution to take this step was the Bahamas Central Bank. In October 2020, it launched the Sand Dollar, a digital equivalent of the Bahamian dollar (B$). It can be used via an app or a physical payment card with access to a digital wallet.  

On the other side of the globe, Chinese banks are concerned about their decreasing importance in Chinese citizens’ lives, a consequence of the widespread use of digital payment systems. To reshape the financial landscape in its favour, the Chinese Central Bank is planning to launch the DCEP (digital currency electronic payment) or e-yuan. This digital currency won’t be based on blockchain technology and will be storable in commercial banks’ digital wallets.

Whipped up by Chinese technological breakthroughs in digital currency, the US Federal Reserve started working with MIT to estimate the possibility and efficacy of implementing a digital dollar.  

Europe has also joined this high-tech banking race. The European Central Bank is working with the European Commission on launching the digital euro. Digital currencies are also on the agenda of the Swedish Riksbank (e-krona) and the Bank of England. 

Cryptocurrencies and digital financial platforms are challenging traditional banks, forcing them to implement digital currency in hopes of maintaining their relevance. Even in the era of digital transformation, however, traditional cash will not be completely replaced. Central banks are considering issuing CDBCs in parallel with physical banknotes to avoid future economic turbulence.   

Sources: 

https://www.wsj.com/articles/the-coming-currency-war-digital-money-vs-the-dollar-11569204540

https://www.cnbc.com/2021/04/19/central-bank-digital-currency-is-the-next-major-financial-disruptor.html

https://www.sanddollar.bs/  

https://www.economist.com/finance-and-economics/2020/08/06/do-alipay-and-tenpay-misuse-their-market-power

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