Cryptocurrencies: A Threat to Traditional Banking or a Catalyst for Financial Evolution? | By Shrey Parikh
By Shrey Parikh
Abstract
Cryptocurrency is transforming the global financial landscape, offering a decentralised, secure alternative to traditional banking. Using blockchain technology, cryptocurrencies like Bitcoin and Ethereum enable peer-to-peer transactions without intermediaries. This paper examines cryptocurrency's rapid adoption, its role in promoting financial inclusion, and innovations like decentralised finance (DeFi), smart contracts, and stablecoins. Despite its potential, challenges such as regulatory issues, environmental impact, and security risks persist. Traditional banks face disruption but also opportunities to integrate blockchain solutions. A future financial system blending cryptocurrencies, central bank digital currencies (CBDCs), and traditional banking could foster innovation and stability with the right regulatory balance.
What is Cryptocurrency?
Have you ever wondered what cryptocurrency is? Why are so many people talking about it and why has it become so popular since this decade? Well, here’s why: A cryptocurrency is a digital currency, which is an alternative form of payment, used to securely exchange goods and services without the need for a third-party institution. It’s a peer-to-peer system that can enable anyone, anywhere to send and receive payments. Instead of physical money being carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets where the person who owns the crypto has the private key for their wallet and this makes it almost impossible for anyone else to access it.
Cryptocurrency in the modern economy
Despite being quite a new form of currency, cryptocurrency has gained popularity quite radically and it holds significant importance in today’s digital era. Some famous cryptocurrencies are Bitcoin, Ethereum, Tether, Binance coin and many more, however, the first ever cryptocurrency was Bitcoin developed by Satoshi Nakamoto in 2009 (although there are a few other theories as to who originally created Bitcoin, we will leave that topic for later). There are many reasons why cryptocurrency is used. Firstly, investors use cryptocurrency to trade stocks in both long and short term investing. Cryptocurrency can be quite volatile in its worth so it’s usually used by high profile investors to aid their investing and bought on online crypto trading platforms. There are of course other ways to earn cryptocurrency such as bitcoin and this is usually done through a process called “mining”. Usually, huge firms would use GPU processors typically built to mine Bitcoin to gain profit. Mining is a process whereby a computer solves a series of mathematical problems in order to find a hash which can be used to get the bitcoin as a reward and every 4 years the reward for bitcoin halves (the last time it happened was in April 2024 to 3.125 BTC in order to keep bitcoin scarce).
Secondly, cryptocurrencies can be used as a medium of exchange. They have revolutionised access to financial systems, particularly for the unbanked population. In LICs (low-income countries), where banking infrastructure may not be as strong, and where banks leverage their power to create monopolies, cryptocurrency can be a viable option. For example, in Nigeria, the use of Bitcoin has increased because it can bypass tight banking laws and offer more affordable remittance services. Similarly, El Salvador's adoption of Bitcoin as a legal tender showcases its potential to bridge financial gaps by allowing its citizens to easily transfer money and facilitate payments through mobile apps. Cryptocurrencies create financial inclusion for people excluded from other means by allowing participation in the global economy. This is one of the main reasons for concerns about cryptocurrency overtaking traditional banking methods. This is exacerbated by cryptocurrencies' ability to facilitate cross-border transactions at a fraction of the cost of conventional banking systems. There’s no need to spend hours finding the best deal to send money to friends or family in another country because cryptocurrency can do it at a fraction of the price. This is because cryptocurrencies like Bitcoin are not owned or regulated by any single firm or government, eliminating the need for money transfer providers such as Western Union, which often charge high fees for cross-border transactions.
For example, platforms like Stellar and Ripple are specifically designed to optimise cross-border payments with near-instant processing and minimal transaction fees. This cost efficiency benefits both individuals and businesses, making international
trade more accessible. And this is just the tip of the iceberg. There are many new opportunities for cryptocurrencies in the future, including concepts like decentralised finance (DeFi), smart contracts, and stablecoins. DeFi platforms allow users to invest, lend, or borrow without intermediaries, creating an inclusive and sustainable financial ecosystem. It is a peer-to-peer network, similar to the one used for Bitcoins, that uses blockchain to enable businesses and individuals to transact directly with each other without the need for an outside entity. Smart contracts, powered by Ethereum, execute agreements automatically when predetermined conditions are met, reducing reliance on traditional legal frameworks. Stablecoins, such as Tether (USDT) and USD Coin (USDC), combine the benefits of cryptocurrencies with the stability of fiat currencies, making them ideal for everyday transactions. These innovations highlight the transformative potential of cryptocurrencies beyond simple payments.
Challenges to Traditional Banking
The biggest challenge to traditional banking from cryptocurrency lies in the fact that cryptocurrency is decentralised, which directly challenges the core of the centralised banking model. Traditional banks rely on centralised authorities, such as governments, for regulation and trust, which is considered a key aspect of their operations.
In contrast, cryptocurrencies use blockchain technology to ensure transparency and security without intermediaries. This rapidly changing system has prompted some banks to adapt and collaborate with governments to create solutions like Central Bank Digital Currencies (CBDCs). These aim to combine the strengths of both systems—the efficiency of cryptocurrencies with the stability and control of traditional banking. For instance, China’s digital yuan exemplifies how centralisation can coexist with blockchain technology, offering controlled yet efficient transactions.
Another reason traditional banks feel threatened by cryptocurrencies is their potential to erode the monopoly banks hold over loans, payments, and savings. Peer-to-peer networks bypass intermediaries, empowering individuals to transact directly. Platforms such as Compound and Aave, for example, enable users to earn interest or take loans without interacting with traditional banks. This shift forces banks to reconsider their value propositions and compete in an era of evolving financial
systems.
However, cryptocurrencies have their drawbacks. Mining bitcoin, for instance, is time-consuming and requires considerable energy; some mining operations use more electricity in a year than entire countries, which raises concerns about
sustainability. The regulatory challenges are also huge, as governments try to address issues such as tax evasion and money laundering. Another issue is that cryptocurrencies are very volatile, often experiencing large changes in price, which ultimately undermines their function of value storage. Further complications arise in regards to wide-scale adoption: risks like hacking and double-spending attacks. This makes security a very serious issue.
The Future of Cryptocurrencies and Banking Cryptocurrencies, CBDCs, and traditional banks are likely to coexist going forward,
creating an ecosystem that is a blend of all of them. While cryptocurrencies offer decentralisation and innovation, CBDCs provide stability and regulatory oversight. Governments worldwide are examining regulatory systems that allow equilibrium between financial stability and throttling innovation. For example, the European Union's Markets in Crypto-Assets regulation attempts to create a unified code for regulating cryptocurrency.
In the long term, embedding blockchain technology into traditional structures can also improve the transparency and speed of bank processes. Smart contracts may, for example, enhance the lending approval process by speeding it up, and DeFi can offer new investment avenues. Of course, this will only be a reality if issues of sustainability, security, and compliance with regulatory policies are overcome.
Conclusion
To conclude this paper, I would like to share my own perspective on cryptocurrency and its potential impact on the future. I believe that if nations and governments continue to neglect the integration of cryptocurrency into the global financial system, an economic crash could become inevitable under specific circumstances. This scenario would occur if two major events coincided: significant volatility in cryptocurrency leading to a crash in the stock market, and a severe recession caused by external forces, such as a major war, which could devalue traditional currencies.
While this may seem dramatic, many economists argue that a recession is a natural part of the economic cycle. However, the next one could pose unprecedented challenges due to the factors mentioned above. If cryptocurrency remains poorly integrated, traditional banking systems might struggle, and the collapse of major financial institutions could trigger a domino effect across global economies.
In summary, cryptocurrency has the potential to revolutionise the future of finance, but its integration must be handled carefully to avoid catastrophic consequences. Governments and financial institutions need to act proactively to ensure stability while embracing innovation.
