Cryptofication of Financial Institutions in 2022 and Beyond
Since the Covid-19 pandemic hit the world, many significant changes have been experienced in various industries and life as a whole. However, even before the pandemic, the financial industry had already experienced disruptions due to increased technology innovations. Among the notable aspects include increased digital payments, blockchain technology, and increased use of cryptocurrencies.
As a result, major banks, central banks, and regulatory agencies have repeatedly reacted to the above trends positively and negatively. Precisely, the issue of cryptocurrencies in recent years wasn’t a “good vibe” to the traditional financial system, i.e., banks and central banks. However, the narrative has been changing over the years. Additionally, the cryptocurrency market has had tremendous growth over the same period.
A Quick Glance
Let’s first glance at the relationship between cryptocurrencies and financial institutions.
One of the remarkable cryptocurrencies is Bitcoin, which has existed since January 2009. Over the years, this cryptocurrency has continually grown in value, and millions of people have embraced it. It’s estimated that there is over 18 million Bitcoin in circulation. Additionally, statistics depict there was significant growth of the global user base of various cryptocurrencies by nearly 190% from 2018 to 2020. Generally, it’s a clear sign that the crypto market grows every day.
On the other hand, we cannot ignore the role of banks in the financial ecosystem and economy. So, how have the banks been reacting to the issue of cryptocurrencies? At first, financial institutions were very skeptical about cryptocurrencies. For instance, in 2014, Jamie Dimon, Chief of JP MORGAN Chase, perceived Bitcoin as a terrible option for value storage.
Additionally, most government and central banks have been against cryptocurrencies. For example, in 2021, China declared all crypto-currency transactions illegal. Also, in 2017 Grant Spencer, the New Zealand acting governor, in one of the interviews with TVNZ, warned against Bitcoin investments and perceived it as a speculative bubble.
Regardless of all perceptions by government and financial institutions, the cryptocurrency market is still growing. Recently, some banks have realized crypto-related services would be essential in their portfolio to keep up with the competition. A big player in the U.S banking sector, such as JP Morgan, has created a digital coin (JPM Coin) and provides access to crypto funds for their wealthy management clients.
Further, Central Banks have initiated projects to have their digital currencies, i.e., Central Bank Digital Currency (CBDC). People’s Bank of China, Central Bank of Nigeria, Bahamas’ Central Bank, Eastern Caribbean Central Bank, and Zimbabwe’s Central Bank are the best examples of central banks exploring digital currencies. El Salvador went further and classified Bitcoin as a legal currency.
What’s Accelerating Adoption of Cryptocurrencies by Financial Institutions?
As outlined above, the strained relationship between the crypto market and traditional financial institutions has changed over time, and the adoption of cryptocurrencies by banks is evolving. Below are factors/ aspects:
· Increased Demand
Increased growth and education about the crypto market come along with increased demand. That’s a no-brainer.
Cryptocurrency adoption is growing vastly. According to Tripple A, as of 2021, there were approximately 300 million crypto users, and over 18,000 businesses already accept cryptocurrency payments around the world. Tesla is one business that accepts cryptocurrency, specifically Dogecoin, for certain merchandise.
Additionally, another report released by Crypto.com on January 2022 showed a probability of crypto users reaching 1Billion by the end of the year.
Some banks in the U.S, such as Ally Banks and Chime Bank, allow Bitcoin purchase through Ally Bank debit card and Paxful, respectively. In addition, various banks such Wirex, Bankera, and Revolut in the U.K are now offering cryptocurrency-friendly services to their customers.
A financial service provider such as PayPal now allows users to buy, sell, and checkout cryptocurrencies.
· Fear
Blockchain technology is revolutionizing the financial industry whereby it’s has established new financial processes and services infrastructures. Therefore there is a profound interruption on the traditional financial ecosystem.
Cryptocurrencies rely on Blockchain technology which is decentralized. As a result, there is fear that the crypto market might/will cut the link between the Central Banks and the economy.
For this reason, financial institutions are adopting mechanisms that are crypto-friendly to help them stay competitive and relevant.
What Do We Expect? What’s the Future?
Will Central Banks and other financial institutions keep up with the growing demand for cryptocurrencies if they don’t adopt them? This is the elephant in the room! Some banks will likely add crypto-friendly services to their portfolio regardless of continued bans on cryptocurrencies. Additionally, more businesses are likely to embrace crypto payment for goods and services.
So, will crypto be a free reign? It will depend on regulatory clarity in different countries around the world, especially developed nations. Regulatory clarity is currently one of the reasons most financial institutions are reluctant to adopt cryptocurrencies. Additionally, countries whose fiat currencies are depreciating may consider adopting cryptocurrencies.
Lastly, we can anticipate that most Central Banks will launch digital currencies. However, the demand for cryptocurrencies is not likely to decrease as an effect of CBDCs. Why? Both are digital currencies operating in different spheres, i.e., cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin are decentralized while CBDCs are centralized.
In addition, crypto users and enthusiasts might not consider digital currencies since their crypto investments and trading depends on volatility and anonymity. And this is one characteristic of the crypto market.
What’s your opinion? What do you think?
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