Banks Are Lobbying Hard to Block the Rise of Crypto – They’re Fighting an Impossible War
The past decade marked the mainstream emergence of blockchain technology and cryptocurrencies, which had been designed to have disruptive potential. Owing largely to its decentralized, peer-to-peer nature, they have been making inroads into many stagnant industries, most notably the conventional banking system.
As the phenomenon has evolved beyond the speculative moves of Bitcoin prices, legacy banks come to realize that they have a lot to fear from cryptocurrencies.
Over the last few years, banks actively opposed the widespread adoption of bitcoin and its peers. Citing fraud and AML concerns, major banks and their brokerage arms have banned their advisors from recommending cryptocurrency investments to clients.
Other banks were more consistent and warned that cryptocurrencies could impact their competitiveness and reduce their revenues and profits long-term.
The critics camp included prominent figures who described bitcoin as nothing more than a modern-day bubble. CEO of Wall Street banking powerhouse JP Morgan Chase, Jamie Dimon, was counted in the latter group. He called bitcoin a “fraud” that is “worse than” Holland’s tulip bulb mania, and “won’t end well.”
Regulatory and Operational Risks
At the early stages of development, there were substantial grounds for keeping many incumbent financial institutions on the sidelines. This list of concerns included:
The Lack of Clarity
Cryptocurrencies had been a young asset class without an institutional framework. Are they security, legal tender, payment option, digital money, or something else? Although this dilemma hasn’t been resolved yet, the creation of regulatory standards for cryptocurrencies is apparently underway.
The immutability of blockchain, although touted as a major advantage, was cited by banks as another hazard. They say this feature makes it nearly impossible to take corrective actions if operational errors or internal fraud are discovered after a blockchain transaction is submitted.
Furthermore, banking institutions claim they have little obvious reason to employ blockchain, which vastly consumes power to process fewer transactions at slower speeds. In this sense, it has less or no advantage over traditional databases.
Bad for the Environment
Another critique is that blockchain technology and its cryptocurrencies are highly inefficient and carry severe environmental consequences.
The Untold Story
This very loud backlash against cryptocurrencies from banks – which is as old as Satoshi Nakamoto’s whitepaper – begs another question: If the immediate threat posed by blockchain is less imminent or negligible, what do banks have to be so afraid of?
Truthfully, the risk factor derives from the ability of cryptocurrencies to bypass intermediaries through transacting at a distance within a decentralized system. This challenges banks’ business model that depends on their exclusive role as trusted nodes.
Additionally, despite their widely acknowledged flaws, new blockchain technologies, and applications – DeFi, and NFTs, to name a few – have made attempts to solve one or more of these problems, with huge success.
In other words, the idea of replacing banking functions with a decentralized network no longer exists in the realm of theory but has become practically possible.
The cryptocurrency philosophy also extends beyond just the technology and has a democratizing effect. For example, the lack of so-called ‘incumbent banks’ or any other central authority means that nobody can impose expensive transaction fees, seize your assets, or restrict access to essential services. This, again, challenges the status quo, which tends to rely on a lack of transparency in the banking system to make a profit.
Let’s take a look further at how exactly cryptocurrencies pose a threat to banks’ long-term viability, or at least where it lies its disruptive effect.
Disrupting Remittance Market
Perhaps the most striking instance of how blockchain can revolutionize a stagnant industry comes from remittance and payment markets. Cryptocurrency threatens to upset the dominance of traditional systems that are too slow and expensive. Blockchain wants to make it fast and inexpensive.
Global payments are currently processed through a system of intermediaries. Each intermediary – like corresponding banks – takes his slice by adding additional cost to the transaction fee, and also creates a potential point of failure.
By contrast, cryptocurrencies have the potential to reform global remittances by stripping costs to be independent of transaction size.
The blockchain-enabled innovation also allows for payments to be instantly cleared and settled as soon as a transaction is made. By comparison, current banking systems begin a lengthy process that could take up to two weeks to complete a transfer or payment transaction.
These advantages give cryptocurrencies an edge over legacy remittance systems that usually offer limited accessibility and charge arbitrary fees.
Smart Contract Innovations
Before the emergence of smart contracts, blockchain was touted as a disruptive technology to revolutionize elements of banking functions. However, the prospects have changed as the technology evolved far beyond underpinning cryptocurrencies.
Smart contracts allow banking transactions to be carried out among disparate nodes, all without the need for a central authority or enforcement mechanism. In other words, it’s no longer trying to only improve the legacy systems, but, instead, it has opened the door to create an entirely new ecosystem.
Take, for example, decentralized finance (DeFi). This isn’t merely another unwelcome disruption for banking systems, but it can provide a viable alternative to both banking and investment products. There are many other instances to list in this review.
Can Competition Eventually Lead to Co-operation?
So, in the end, is this battle between crypto and incumbent banks have to be a zero-sum game, or are the two likely to converge over time?
Actually, there is room for mutually beneficial solutions, and there are examples where cryptocurrencies are complementing existing solutions rather than replacing them.
Banks can take advantage of many aspects of blockchain technology in order to enhance the way they communicate with each other. They can also use their weight and resources to develop credible pathways between their centralized infrastructure and the new world of DeFi.
This is not speculation. The attitude of heavyweight banks toward cryptocurrencies has already changed significantly over the past two years. Some have launched trading vehicles to allow their wealthy clients to exploit the recent bull market.
More particularly, big names like BNY Mellon, Nomura, and Standard Chartered have become crypto custodians. JPMorgan Chase, Morgan Stanley, Wells Fargo, and Goldman Sachs are also broadening their cryptocurrency interests and enabling access to bitcoin funds.
Even government authorities are finding it hard to resist the allure of crypto, with many central banks around the world, are piloting their own cryptocurrencies (CBDCs).