No More Traditional Banks? Say ‘Hi!’ to Crypto-Banks

crypto banks

For many centuries the banks were the only major financial power in the world. Those who control the money, control everything, as anything (and anyone) can be bought in one way or another. But now the paradigm is shifting with the coming of crypto exchanges. Cryptocurrencies give financial power back to the people by removing the third party control. This is one of the biggest revolutions of the last few centuries, because for a long time only the governments had the right to issue money. Now it’s the time to change.

In this article we’ll try to show you why banks may soon be dethroned, and more importantly, how it may happen.

Why the change seem inevitable

There’s roughly $90 trillion of fiat currencies in the world, issued by various governments, circulating everywhere, or held in bank accounts. US external debt now exceeds $21 trillion, and the total world’s debt is over $50 trillion. Cryptocurrencies, in this case, are regarded as an alternative to government issued money, a kind of people-issued money. Crypto exchanges serve as an entry point and can be seen as the new kind of banks for crypto, an alternative banking system for the people’s money.

Some traditional bankers don’t like crypto, but they can’t do anything about the current trends. Jamie Dimon, who called Bitcoin a fraud in 2017, now says that he regrets saying that. Of course, he was forced to express his regret, otherwise he would look pale in comparison with his other colleagues.

For example, Christine Lagarde, head of IMF, said: “Citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender. So, when the new service economy comes knocking on the Bank of England’s door, will you welcome it inside?”

Effective systems wipe out the ineffective ones. That’s the rule. New decentralized monetary system may be faster and even more stable than existing ones. A weak government with a failing economy and hyperinflation may be out-rivaled by cryptocurrencies, which could become more stable.
“Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0” (Christine Lagarde).
Take a look at Venezuela – its inflation rate jumped by 46,305% in 2018, making bolivar practically worth almost nothing. In this situation, Venezuelans use cryptocurrencies in everyday payments, as even the volatile bitcoin looks like a stablecoin in comparison with bolivar, and bolivar now costs less than the paper that it’s printed on. People can’t expect the government to solve their problems, so they try to solve them by themselves. Crypto is the most convenient means of payment that Venezuelans can use, because in our days pretty much everybody has cell phones. It makes Venezuela the first country where crypto gets ground level adoption.

But it’s only the beginning. Mark Carney, the Governor of Bank of England, calls it “part of a potential revolution in finance”. It will spread further, gaining a wider adoption as soon as people in other countries see the benefits of using it.

Why crypto matters

According to Chris Larsen, Ripple CEO, we’re seeing the beginning of the “Internet of Value”:
“Exchanging value will be as easy as exchanging information today on the web. We expect the Internet of Value to give rise to a dramatic increase in the volume of payments, and innovation in payments.” He continues, “[t]he Internet drove the same outcome for information sharing – think of the volume of information we share daily via the web, and the entire new industries and innovations made possible by the Internet.” In the “Internet of Value” any asset can be traded for another in a second, any physical asset can be tokenized and traded: oil, real estate, cars, other currencies, gold.

Some countries are now trying to restrict the revolution. China, Russia – they aren’t really friendly to crypto assets. Some of the officials are even regarding it as a pyramid scheme. Elvira Nabiullina, the Head of Russian Central Bank, stated: “We, in fact, do not legalize pyramids”. She thinks that every currency should be backed by a government of some country, otherwise it’s a fraudulent scheme, a pyramid. But the problem is that crypto is only in its initial phase, and it needs mass adoption and acceptance by many countries to stop such talks. It would be seen as a strong currency then, maintaining its value because of a great demand, not because everyone keep buying it in hopes to get rich.

ECB chief, Mario Draghi, thinks that “With anything that’s new, people have great expectations and also great uncertainty. Right now we think that especially as far as bitcoins and cryptocurrencies are concerned, we don’t think the technology is mature for our consideration”. That also means that there are more things to come. And the major role in this shift will be played by crypto exchanges that contribute a lot to the popularization of crypto in the world.

There’s always a bigger fish

According to the decentralized nature of cryptocurrencies, crypto exchanges have always been independent from all governments. Not all of them, of course, as many local exchanges still can be shut down. All big exchanges, operating worldwide, don’t care about local restrictions. For example, in 2018 Japan tried to impose strict regulations on exchanges. After receiving a warning letter, Binance simply moved to Malta. Many small countries will be more than happy to welcome large exchanges, as it means additional income into their economy by taxes. It’s worth noting that Binance is now more profitable than 148 year-old Deutsche Bank.

Binance CEO Changpeng Zhao said: “Binance is the world’s largest cryptocurrency exchange. In the first 3 months from inception, profits amounted to $7,500,000 USD. In the 2nd quarter, profits amounted to $200,000,000 USD. The 3rd quarter is still in progress, and is expected to have further growth. Any country that can attract Binance to open a branch in their location will receive a handsome tax income revenue.” What could be more interesting for any country than a solid tax revenue? The effective tax rate in Malta, after all refunds, is near 5%. With the profit of $200 million, Binance should have paid $10 million in taxes – pretty good for a small country like Malta!

Thus the position of crypto exchanges is very secure – they always will have some place to move to, being a desired guest. Not having anything to worry about, they can develop further. As we’ve already seen, exchanges are slowly evolving. They don’t want to be in a place where people can buy Bitcoin or any other cryptocurrency, and log out after that. They want to become the new banks. Why is that? Technology moves forward, and their rival –  decentralized exchanges (DEX), are already around that corner.

Is the development of a mainstream decentralized exchanges even possible? We don’t know yet. To make it real, the main problem of crypto, scalability issues, has to be solved. Developing a truly scalable blockchain can take many years. If it gets solved, we’ll see a fully operational DEX.

It’s entirely possible that decentralized exchanges will take a part of volume from centralized exchanges, as they have a lot of supporters. For example, Vitalik Buterin, Ethereum’s founder, said “I definitely hope centralized exchanges go burn in hell as much as possible[.]” He explained that you don’t even need to log in to use a decentralized exchange. The only reason for centralized ones to exist is because they support fiat. That’s true, partially, as many people would switch to DEX if they had liquidity, a friendly user interface and fiat integration. But some people wouldn’t, for the sake of feeling safe and having the technical support to write to. Thus, centralized exchanges aren’t going anywhere, they are going to stay, even with wide crypto adoption.

The wide adoption hasn’t happened yet because crypto still has its fundamental problems, one is the recovery of the lost private keys. There must be a way to recover it, and there will be a lot of people who don’t want to be bothered with these technical issues. “People won’t give up the ability to complain to somebody and reverse a payment.” – Chris Larsen. Therefor centralized crypto exchanges have features of both worlds: they incorporate some sort of a reliability, but at the same time they are a part of the crypto world. Changpeng Zhao responded to Vitalik’s “burn-in-hell” wish on Twitter: “Let’s have a bigger heart, and appreciate the fact that we are part of an ecosystem.” He continued, “Just because someone else is doing the lowly grunt work, doesn’t make them dirty.” Emphasizing that “There is no absolute decentralization…” He’s right. And right now centralized crypto exchanges do the hard work, preparing the foundation for the future infrastructure.

Replacement for all standard services

What services are offered by the banking system today? Payments, accounting, custody, loans, insurance, debit and credit cards. All these services can be implemented in a decentralized economy via smart contracts or via centralized providers, which would be a preferred option for many people.

As we’ve seen recently, Coinbase began to offer a custodian service for large crypto investors. Another one opened by BitGo. These services are aimed at funds that need someone to store crypto for them, as they can’t simply store it on a flash card and put it in the pocket of their chief due to strict compliance rules. It’s highly probable that soon we’ll see traditional banks like Goldman Sachs or JP Morgan launching similar services. The fight between old and new will be long, but in the end both will be interconnected. Now we see banks buying exchanges, because they see the potential of the industry, like in the case of Circle, a Goldman Sachs-backed fintech firm, buying Poloniex. Or we see them opening their own exchanges, like SBI Holdings.

But crypto startups also make acquisition moves. Recently, the Litecoin Foundation, coupled with TokenPay, bought nearly 20 percent of WEG Bank AG and now they have plans to issue their own crypto card for payments in Litecoin. Charlie Lee, creator of Litecoin, said about it “If you can’t beat them, buy them.,.”

Speaking of payments, using cryptocurrencies for buying things requires a very sophisticated infrastructure. The problem is that there’s no general understanding of crypto yet, and no significant demand, everybody just hoards crypto instead of spending it. Thus we see a lack of liquidity providers, lack of payment solutions, Point-of-Sale (POS) terminals. All of which are necessary because there should be a way for merchants to accept crypto. In the last few years many implementations of cryptocurrencies were issued, but only a few of them were building a proper infrastructure from the start. For example, the fintech startup FiiiPay aims to become a wallet for everyday use, managed to incorporate more than 1,500 cryptocurrencies. This means you won’t need to carry around a debit card or a physical wallet because you’ll have it in your mobile phone. For end user it looks like a simple mobile application, but building this kind of simplicity is very hard work. More than 1,500 cryptocurrencies converting instantly to fiat when you open the application and tap the confirmation on your cell phone. Instant transactions, very low fees. Imagine it to be like ApplePay, but it’s crypto instead of strictly fiat. Aside from simplicity, the only thing that the end user needs is a decent level of security, like Two-Factor Authentication, that will keep your funds safe.

During her speech, Christine Lagarde gave a beautiful example of what a modern economy will look like soon: “Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.” These cross-border payments can also be made via FiiiPay without even worrying about the currency exchange rate.

Over time, there will be more and more competitors among blockchain payment providers, but first-movers will have an advantage in this new economy. That’s why many crypto exchanges and startups try to implement as many features as possible, because it will be harder to catch up with them later. That’s why we see Binance opening its crypto bank to build a bridge between traditional and crypto finances, and to be one among the first. Along the same line we see FiiiPay selling specialized crypto POS terminals to build a bridge between traditional merchant and those consumers who want to pay with crypto. Who will profit the most? Those who sense the coming trends. Who will win? We don’t know yet. But it’s quite likely that one of these crypto exchanges that we know today may become a multibillion dollar company 10 years down the road., Will the crypto industry will play a major role in all of our lives? Absolutely. How exactly will it happen? We’ll have to wait and see.