How are cryptocurrencies going to affect the banking landscape?
With new cryptocurrencies frequently being introduced, questions are being raised about the impact this will have on banks. Will they be forced to adapt their services? Will they create their own cryptocurrency? And, if banks are impacted, what will this mean for their customers? We aim to cover these questions, and more, in this article.
What is a cryptocurrency?
A cryptocurrency is a monetary unit that has no physical form. Instead, it’s stored electronically in the blockchain. Encryption methods are used to control and verify the transfer of funds and, unlike other currencies, the supply isn’t determined by a bank. The most well-known example would be the original cryptocurrency, Bitcoin.
A brief history of cryptocurrencies
In order to truly understand the impact cryptocurrencies could have on the banking landscape, it’s important to have a brief understanding of their history. This helps to give an idea of how quickly they’re growing in popularity.
The number of cryptocurrencies is increasing at such a rate that, in 2014, the UK Treasury announced it would undertake a study of cryptocurrencies. This study would then also help to determine their role within the economy.
What this could mean for banks and customers
As Chris Skinner, author of Value Web, explains, “People who could not access trade and finance ten years ago can do so today. This will lift many out of poverty.” It’s giving those that may not previously have been considered by traditional banks another financing option. And with cryptocurrencies, not only will people not need to interact with banks the same way they do now, they’ll also be able to avoid bank fees.
Between April 2015 and April 2016, over 600 bank branches in the UK were closed. And in 2016, HSBC reported that they’d seen over a 40% reduction in the amount of people visiting their branches. When you consider all of this, it’s understandable that some banks are concerned about the impact cryptocurrencies could have on the banking landscape. If they continue to rise in popularity, physical banks may eventually become obsolete.
What experts are saying about cryptocurrencies
With cryptocurrencies giving people a new method of financing, many believe that banks are feeling threatened. Johann Palychata, Research Analyst at BNP Paribas, has suggested that banks will need to consider how to utilise the technology behind cryptocurrencies. If they don’t, there’s a possibility they will become out-dated and redundant.
Some concerns were highlighted in BBA’s Digital Disruption Report. When looking at what makes cryptocurrencies different, it states, “They can be readily translated into regular currency and used to make regular transactions, despite not being issued by a central bank or subject to central monetary authority.” This raises questions around a traditional banks offerings and whether they need to improve their services.
The banks reaction to cryptocurrencies
When it comes to banks across the world, there’s been a bit of a split in terms of reactions. Some countries are completely against it, whereas others believe it could provide a wealth of opportunity.
Both China and Vietnam have gone so far as to ban cryptocurrencies. In a recent statement, Vietnam’s state bank said that Bitcoin and other virtual currencies weren’t accepted as a lawful means of payment. The statement then went on to say that using cryptocurrencies could result in a fine of between VND 150 – 200 million.
However Tony Richards, Head of Payments at the Reserve Bank of Australia, doesn’t think this approach is necessary in Australia. He says, “From the bank’s payments policy mandate, digital currencies do not appear to raise any pressing regulatory issues.” He suggests that, instead of trying to regulate cryptocurrencies, perhaps it would be more beneficial to regulate the industry aiding it. He also implies that cryptocurrency and blockchain could actually provide banks with potential opportunities.
British banks have been reported to shun companies handling cryptocurrencies, with the Bank of England having said that, “If a central bank were to issue a digital currency, it would have wide-ranging implications for monetary policy and financial stability.” However, despite this, the bank has also said they’re researching whether a central bank-issued currency could be feasible.
Could cryptocurrency be the future of banks?
It’s difficult to answer this question with confidence. As Gregory Efthimiou explains when writing for The Market Mogul, “Failure to adhere to traditional financial practices could eventually hinder the longevity of the venture.” This suggests that perhaps a middle ground needs to be found; banks need to do more to understand and accommodate the blockchain technology behind cryptocurrency, and the creators of new cryptocurrencies need to consider and appreciate the importance of traditional banking practices.
And it seems this is something more banks are considering. Despite general reservations within the industry when it comes to the effect of cryptocurrencies, six banks are working together to create their own. These include: HSBC, Barclays, State Street, Canadian Imperial Bank of Commerce, Credit Suisse, and MUFG. Perhaps they’ll be able to harness the blockchain technology in such a way that cryptocurrencies are regulated, removing concerns about criminal activity.
Cryptocurrencies effect on the banking landscape
It’s too soon to say what the best approach for both banks and creators of new and existing cryptocurrencies may be, but one thing is clear; change is likely to happen. Huxley are going to be monitoring the market and will continue to share updates and insight.
If you’re interested in new opportunities in the banking sector, or are looking to hire, contact us and our consultants will be happy to help.