With cryptocurrencies entering the picture, things became more complex. Although banks remain the primary players in financial transactions, they are no longer the sole providers.
So, what exactly has happened in the short span that crypto has been in the picture?
Understanding this requires an understanding of how cryptocurrencies and traditional money share similarities. However, to provide a comprehensive view, we’ll also examine the impact of crypto-driven financial system transformations on the banking sector.
What is Cryptocurrency?
This is a digital currency that doesn’t rely on banks to maintain security. Instead, it uses cryptography. Unlike traditional currencies issued by central banks, cryptocurrencies like Bitcoin and Ethereum are completely decentralized.
This is possible through blockchain technology. Think of it as a tamper-proof ledger where all transactions are recorded without divulging personal and sensitive details, like a big Hollywood secret. The transactions are bundled in blocks and then chained together to record everything chronologically.
What is a Crypto Wallet?
The concept of a wallet is in the name, it stores the value of your currency. Your crypto wallet does two main things:
- Manage your private and public keys – This allows you to gain access to your funds and have others send you cryptocurrency, respectively. You can compare this to your bank account number (IBAN).
- Authorize transactions – Your private key signals the transaction's completion.
But with a cryptocurrency wallet, things work differently. Instead of actually keeping your different crypto assets, it only records and provides the transaction history.
What is Traditional Currency?
It’s the currency that banks and governments officially recognize. Think of Dollars, Euros, and any other money that we collectively decided are worth something.
Unlike their crypto counterparts, traditional currencies are centrally controlled. Some regulations can be changed at any time. And since we’ve moved on from using salt as currency, perhaps to avoid high blood pressure collectively, it has been used to represent value, allowing us to buy and sell things easily.
Key Differences Between Cryptocurrency and Traditional Currency
Both types of currencies can be used to store and exchange value, but that’s about it. In the table below, we’ve summarized the differences between crypto and fiat currencies:
Decentralization vs. Centralization
Cryptocurrency is decentralized, so no single person or entity holds power over the system. Meanwhile, fiat currency is the complete opposite, centralized, with governments and regulatory bodies making all the calls. In other words, they can make decisions that impact your assets’ value and usage.
Technology and Infrastructure
Online banks may have become the norm, but transferring funds may still require the use of third-party payment networks. However, through the consensus mechanisms (leveraging crypto miners, validators, etc), the crypto blockchain itself verifies and records all transactions within its own ecosystem.
Regulation and Control
Today, even crypto assets are subject to regulation. Still, the level of government oversight is minimal compared to what traditional banks undergo. And even if regulators establish legal frameworks, no one can alter how a crypto blockchain operates.
Volatility
The value of a crypto asset can skyrocket, like Shiba Inu, when it hits an all-time high of 1.32 million percent of its initial value. It can also crash rapidly, similar to what happened with the SQUID coin. Fiat money is less prone to this level of volatility (except in periods of hyper inflation).
Usability
The money that you withdraw from a traditional bank can be used everywhere because it's legal tender. Crypto may not be as convenient right now, but it remains a valid option for digital purchases. And if the cost of fiat transfers is too high or requires excessive red tape, using XRP, TRX or LTC may be a better alternative.
Transaction Speed and Cost
Assuming no network traffic, crypto transfers are faster. Operations aren’t limited to banking days because miners are working 24/7 to secure your transactions. Moving cryptocurrency around can also be cheaper, especially when there’s no network traffic.
Security
The primary reason people trust cryptocurrency, despite the absence of a centralized authority, is that the blockchain underpins it. This makes it practically tamper-proof, as a hacker cannot simply reverse a transaction.
Banks don't enjoy this level of security. However, because governments and financial institutions back fiat currency, your money may be protected if it's lost due to fraud, hacks, or user errors.
Crypto Wallets vs Bank Accounts
When you’re comparing the apps, they may look a bit similar. However, crypto banking is far different from what you see in a regular bank. See how the two types of accounts can be so different:
Control and Ownership
Crypto wallet owners are in complete control over their funds and private keys. And even though your access is supposed to be private, the fiat banks still control your accounts. They can require checks, change the terms, and even freeze your funds if they deem it necessary.
Accessibility and Transactions
Crypto wallets are great if you want access to your funds no matter where you are. It’s also generally faster because there are no banks to impose restrictions. Today, online banks allow you to get into your account even if you’re outside your country. But the problem here is that they may flag any transaction, restrict your access, or even require additional checks. Crypto won’t.
Security and Responsibility
When you create a bank account, your funds get to be secured by internal systems and insurance. If you lose your login credentials, there are ways to recover them.
But with cryptocurrency, this responsibility of maintaining access to your account falls on you. If you lose access to your private keys, all the crypto funds and assets that you stored in your crypto wallet are gone forever. If you don’t want this responsibility, you can always rely on exchange platforms.
Use Cases and Practical Examples
If you're already using both types of “banks”, you can use the information below to see what's more practical to use:
Blockchain and Banking: Benefits and Challenges
Due to the blockchain, cryptocurrencies have also contributed to improving transparency and transaction speed while keeping costs low. Meanwhile, making crypto banks more mainstream can mean the following additional benefits:
- Improved security – Cryptocurrencies utilize cryptographic validation, making it almost impossible to tamper with existing records. This additional security feature can make it even more trustworthy to users.
- Decentralized bank option – Crypto banks can be more resilient against hacker attempts because there’s no single point of failure.
- Financial product development – New products that can only be made possible through the crypto blockchain, such as smart contracts, may be adopted. This can also improve the quality of services.
There will definitely be a significant adjustment required for banks, as the frameworks of each currency are vastly different from one another. There will also be substantial costs, ranging from creating regulations for crypto use to developing the necessary infrastructure to help banks onboard.
Cryptocurrency and Banks: Transformation of Financial Services
Cryptocurrencies have pushed the boundaries of what’s possible in financial services delivery. They have made transactions faster and cheaper, and traditional banks are trying to keep up with these expectations.
Today, you can join crypto banks, which are financial institutions that combine the features and benefits of both traditional and cryptocurrency options. There has also been more success in legitimizing crypto assets, through MiCA for example, which regulates the handling of cryptocurrencies within the European Union.
But that doesn’t mean that every financial institution today has welcomed cryptocurrencies with open arms. Although crypto banks and apps are becoming more mainstream now, not everyone is on board. They’re still worried about regulatory developments, extreme volatility, and financial crime risks.
Conclusion
Cryptocurrency and fiat money differ in their structure, purpose, and control. However, even though they could appear incompatible at first glance, we're seeing them come together under one roof. It gave rise to crypto banks, enabling users to conduct everyday banking and various crypto transactions.
Yet, the regulations and corporate ties surrounding cryptocurrency assets might strengthen over time. With that, we can expect more fintech partnerships and innovations that will enhance the value banks deliver to their clients.
Disclaimer: The content provided in this article is for educational and informational purposes only and should not be considered financial or investment advice. Interacting with blockchain, crypto assets, and Web3 applications involves risks, including the potential loss of funds. Venga encourages readers to conduct thorough research and understand the risks before engaging with any crypto assets or blockchain technologies. For more details, please refer to our terms of service.