If you’re wondering whether cryptocurrencies threaten financial institutions, you’re not the only one. In some sectors, particularly finance, funnily enough, it’s fast becoming the topic du jour. You don’t have to be a Harvard graduate to see that it isn’t just robots and AI that have FSIs quaking in their boots. Blockchain technology is thundering pretty hard on their heels as well.
But are real-time transactions, decentralization, and automation of trust an opportunity or a threat? And how fine is the line separating the two?
Like pretty much anything surrounding the cryptocurrency world, that depends on whom you talk to. According to Alex Buelau, Co-founder and CEO of Coinschedule.com, one of the biggest ICO portals out there, bankers needn’t worry.
“Die-hard libertarians say that bitcoin is going to end the banking system, but most sensible people realize that the two can coexist,” he says. “It’s like Microsoft Windows and Linux.”
Does that mean that a man in the center of the cryptocurrency revolution, a previous Bitcoin miner and a general cyber enthusiast doesn’t see his business toppling the evil establishment?
“We tried to run things without a bank,” he admits, “but it’s not practical. Not everyone accepts cryptocurrency, there’s the price fluctuation. You can’t replace the banking system, in my view, at least not in the foreseeable future.”
But… what about the future that we can’t see? That might pose a different question.
Cryptocurrencies as a Threat
Colin Luce, SVP of Business Development at Uphold, says, “Cryptocurrencies, for the very first time, pose a serious and significant threat to financial institutions because up until now, all of the innovation in fintech has been at the application layer. Now we’re starting to see payment systems and ecosystems live completely outside of the existing infrastructure stack (credit card rails, deposit accounts, etc.) … finding innovative ways to serve the underbanked and cross-border use cases.”
For those of you who don’t know, Uphold is a multi-purpose cryptocurrency platform that supports more than 30 currencies, both crypto and fiat.
So, if Luce is right, cryptocurrencies and the technology behind them could actually undercut the banks and see the end of financial institutions as we know them.
Bank of America is certainly having a few sleepless nights. But what’s rattling them? A lack of innovation? The expense of updating their existing technology, or an unwillingness to adapt?
Perhaps a combination of these things.
Adapt or Die
You can bet that Bank of America and other multi-billion dollar institutions aren’t going to take things lying down. With some of the brightest minds outside of academia at the helm, it’s much more likely they’ll find a way to adapt and prove their worth in a system that no longer needs centralized authorities.
But they’d better get a move on. There will be winners and losers in this race.
Bitbull Capital provides research and insights into crypto asset markets. Leading the pack of expert minds and their stance on the future of finance, Chief Operating Officer Sarah Bergstrand says, “This will only threaten the financial institutions that fight against it. It will undoubtedly reshape the financial universe as we know it. However, savvy institutions are adopting the technology and using it to reduce their costs, rather than trying to extinguish it.”
Most banks and other FSIs are not falling asleep at the wheel. They’re getting used to fending off and challenging technological threats. What with ATMs, the internet, and fintech startups, these companies have a long history of scrambling to stay relevant, even before bitcoin emerged. From dedicated VCs to hedge funds and M&As, they’re not blind to the threat from the growing army of geeks in T-shirts and sneakers.
Case in point: Goldman Sachs-funded Circle acquired Poloniex for a cool $400 million, making them a first mover in the crypto space. IBM, a company with a history of innovation, is already several steps ahead with its Hyperledger Fabric project, and Ripple is making, well, ripples, with several banks experimenting with their blockchain technology.
Credit Card Companies on The Chopping Block
There are some things money can’t buy. For everything else, there’s cryptocurrency. Not all financial institutions are created equal, as Coinschedule’s boss points out: “It really depends on what financial institutions you’re talking about.” Credit card companies VISA and Mastercard could be the first to feel the pinch.
He says, “If you’re talking about a credit card company, then I think it is a threat because credit card companies are a middleman. They allow you to spend money and they charge fees to you and to the retailer and they make the transaction happen – with cryptocurrency you don’t need that.”
Jeff Falk, Director of Payment Platforms for CO-OP Financial Services, also sees cryptocurrencies as a disruptive force in payments. “I’m not sure that crypto threatens financial institutions in general. It certainly challenges the existing payment rails associated with VISA and Mastercard, as well as any central banking authority, such as the Federal Reserve in the U.S.”
Cryptocurrency aside, credit card companies are already losing ground fast in the world of online payments. By 2021, according to WorldPay, more than half of all online transactions will be carried out using alternative payment methods. Those include bank transfers, e-wallets, and prepaid cards.
The Long View
“We’re at a critical juncture with respect to cryptocurrencies … They could spell the demise of some financial institutions, but we believe that in the long term cryptocurrencies will become the gold standard for finance,” says Andrew Hamilton, founder and CEO of Coupit.
In all likelihood, the global financial system will have no other choice than to move to the blockchain. After all, they’d be pretty foolish to resist a technology that provides a more efficient way of doing things. It’s likely we’ll see a major shift, both in the near future and for the long haul. But the apocalypse for banks? Not likely.
“It’s still early days,” says Buelau. “I don’t see how anyone in their right mind could say that we don’t need banks anymore.” And fiat currencies in general? Well, that’s another question.