This Article is written by Sweety Kumari, a Fifth-year law student of ICFAI Law School, ICFAI University, Dehradun

Introduction

Cryptocurrency is an invention of the 21st century. In the 1980s, the first attempt to create a cryptocurrency was undertaken. From then several developments took place that led to its current form. It is believed that Bitcoin is the first cryptocurrency which was published in the year 2008.

Cryptocurrency marked the advent of a digitalized payment system. In this system, digital networks are used to exchange money. Blockchain technology is used for transacting cryptocurrency. Blockchain is like a public ledger that keeps a systematic record of all the transactions. Cryptocurrencies are traded all over the globe. The traditional system of banking is not used in this process much as there is a decentralized network system to process the transactions.

Cryptocurrency’s impact on Traditional Banking System

The system of remittances

Cryptocurrencies have made sending money worldwide cost and time-effective. Remittances through the traditional banking system were a time-consuming process and costly too as there was involvement of intermediaries. This is not the case with cryptocurrencies. It is rather a decentralized process that cuts down the cost of intermediaries and is also time efficient. Also, the use of blockchain technology has increased the accessibility for individuals.

Inclusion of the unbanked population

As per the World Bank report, approximately 1.7 billion people above the age of 18 do not have bank accounts or access to banking services. Cryptocurrency has provided them facility for storing and transferring money thus connecting them to the financial system.

Fundraising

Initially, banks were the only source of funds for startups. But now funds can also be raised through the digital market in the form of digital assets. This has helped startup founders to raise funds with a comparative ease.

Relationship between cryptocurrency and traditional banking system

Both cryptocurrency and traditional banking systems are intermingled. There is both collaboration as well as competition between these two.

Differences

· Centralization: Banks are the centralized institutions that are relied upon by the traditional system for the regulation of their transactions and keeping a record of them. Whereas Cryptocurrencies rely on blockchain technology which is a decentralized network for its transaction activities.

· Security: There are security measures that ought to be taken by both the systems but due to the decentralized network adopted for cryptocurrencies, it is less vulnerable to certain types of cyber-attacks.

· Regulation: The traditional banking system is subjected to regulations by the Government, whereas there are no such strict regulations for cryptocurrency. They operate in a comparatively less regulated environment.

· Privacy: Transactions in cryptocurrencies are more private than traditional banking systems as they are anonymous.

Similarity

· Payments: Both systems are used for payments.

· Remittances: Both systems are used for international money transfers.

· Investment: Both offer investment options like stocks and bonds. However, the risk attached may vary.

How Banks can benefit by using Cryptocurrency?

With the use of blockchain technology, banking services can be effectively and efficiently carried out which will help the customers. For such usage, banks will have to come up with new laws and regulations to meet the standards. This will give customers a sense of security in transactions and will help in the inclusion of more people in the system. This will ultimately help the banking institutions to increase their profitability.

Conclusion

Cryptocurrency is the advent of this digitalized world. It helps to keep trading at a pace with the fast-growing world. We have looked at how cryptocurrency and traditional banking systems differ from each other but we have also seen that they are not mutually exclusive. Both are somewhere intermingled. Also, by using this system, Banks could gain a great advantage. So, after some time in the future, there may be a hybrid model for transacting and storage in which both the systems co-exist and complement each other.

REFERENCES

· Pete Facty, ‘The Impact of Cryptocurrency on Traditional Banking’ (2024) Medium https://medium.com/@petefacty/the-impact-of-cryptocurrency-on-traditional-banking-76ce1bbdfe1b accessed on 15th September 2024

· ‘Understanding the Impact of Cryptocurrency on Traditional Banking Practices’ (2024) Fintech Weekly https://www.fintechweekly.com/magazine/articles/understanding-the-impact-of-cryptocurrency-on-traditional-banking-practices accessed on 15th September 2024

· ‘The Impact of Cryptocurrency on Traditional Banking’ 2023 Finance Magnates https://www.financemagnates.com/thought-leadership/the-impact-of-cryptocurrency-on-traditional-banking/ accessed on 16th September 2024

· Zubin Mogul, Bernhard Kronfellner, Michael Buser, Chi Lai, Kenneth Wee, Will Rhode, Kaj Burchardi, Anna Golebiowska, Pratin Vallabhaneni, John Wagner, and Alexander Abedine, ‘How Banks Can Succeed with Cryptocurrency’ (2020) BCG https://www.bcg.com/publications/2020/how-banks-can-succeed-with-cryptocurrency accessed on 16th September 2024

· Donald Korinchak, ‘The Effect of Cryptocurrency on the Banking System’ (2021) Cyberexperts https://cyberexperts.com/cryptocurrency-and-the-banking-system/ accessed on 17th September 2024