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Cryptos are expanding exponentially, and so does the use of these currencies. Cryptocurrencies are getting recognition from various countries and being used there legally such as El-Salvador, France, Canada, USA, and many more to digitalize their economies. With the adoption of cryptocurrencies in healthcare, the technology sector, Gaming and other industries, People are looking forward to the banking sector and how they will adapt to crypto development services to better their field.
Many Ventures capitalists, financial advisors, and investors believe that cryptocurrencies have immense probability, and it can be the future of currency. By building efficient and effective solutions with cryptocurrency software development solutions it can better the traditional banking system by making banking services more transparent and faster.
In this blog we will understand about cryptocurrencies, their use, features and how will cryptocurrency affect banks.
What is cryptocurrency? What are the features associated with them?
Cryptocurrency is virtual money that is kept on a blockchain. Cryptocurrency uses encryption techniques for both data management and money transfers. The fact that bitcoin is decentralized and not governed by banks or governments is one of its fundamental characteristics. In the market, there are 17,000 cryptocurrencies. Among these, the well-known cryptocurrencies are Bitcoin, Ethereum, Solana, and Binance. Cryptocurrencies have a huge future where they may be used for more than just money and even serve as a virtual accounting system.
Understanding cryptocurrency's core characteristics are essential for knowing it better.
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Security - Crypto is safeguarded by codes and protected by a cryptography system. The owner has access to a private key to access the data or make transactions. The private key takes care of the security of the owner’s information which makes it more secure and reliable.
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Decentralised - Cryptocurrencies are decentralized data to which the third party such as banks or governments don’t have any access. The data of these currencies are not stored in a single place, but it is distributed across other computer networks for smooth flow.
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Fastest - Cryptocurrencies are so fast that Ethereum-like currencies can execute 20 transactions just in a second. Not only this, but cryptocurrencies can also be converted into real currencies anytime making it better to use.
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Anonymity - The user data and their credentials are always kept anonymous. Cryptocurrencies save data in the form of blocks. So, for those blocks, you are seen as an address of 30 characters. This way currencies keep your data safe without disclosing your info.
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Global payment acceptance - Cryptocurrencies don’t require any person to physically be there. You can make your bitcoin transaction sitting at any place in the world. You can send or receive payment from a neighbouring family or another place on the planet.
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Transparency - When a user sends another user bitcoin, and the transaction is successful. The transaction is then recorded in a public ledger. When the transaction is completed, it is publicly visible to everyone using the network in the form of a bitcoin address confirming transparency among the users.
Why banks are fearful of cryptocurrencies?
Crypto has so many features that it can easily help banks but what is stopping banks from the attainment of crypto and the banking industry? Well, to say there is very split reaction of people, as such to say in a survey 63% of people believe that crypto is a threat to banks. Here are a few points believed to be the main cause of the fear against cryptocurrency.
1. No central authority
Cryptos are decentralized and work on the trust of the blockchain code. Cryptos don’t need any third-party interference for its regulations This is why bankers are skeptical to regulate crypto as they believe this will reduce the power of the bank's authority. The bank authorities believe that cryptos are outmoded and that something new should work better.
2. KYC/AML
KYC and AML submission is important for banks because they keep track of the customers' transactions of money. But with cryptocurrencies, KYC is not required. The user can process any transaction, the transaction is completed through transaction ID, so there is no need for KYC. Bank authorities believe without the KYC (Know your customer) and AML (Anti-money laundering), the regulation of crypto might lead to scams.
3. Volatile in nature
Fluctuations in the crypto market are quite visible. Sometimes the volatility happens in a short period of time. In the morning may be prices are up but within one hour you can see a downfall in these currencies. It occurs for various reasons such as current news, market size, and buying and selling of any currency during a particular period of time. But for the same reason, authorities believe cryptocurrency and banking industry should work separately as crypto is not a steady investment source over the time.
How will digital currency affect banks-
Not to stay behind, Banks need to work with a cryptocurrency framework for smooth-functioning, and advancement of financial services. Banks should think crypto as their ally, which can help build better solution. Let’s understand how cryptocurrency will affect banks and renewing facilities using crypto can help the sector-
1. Custody solutions services
Bank provides services of settlement, protection, and reportage of marketable securities such as stocks, bonds, ETFs, and cash of their customers. With the help of crypto, they can keep it in a private wallet with private keys which only they have access to. Customers can also enjoy Interest in their securities. It can help out the capital market also by making it more effective and interoperable by tokenizing conventional securities like stocks, bonds, and alternative assets and putting them on a public blockchain.
2. Verification and Anti Money Laundering
We have talked about KYC/ AML verification and how important they are, but crypto can help in keeping the data and safeguarding the sector from scams. Cryptocurrency development companies can help to build one database of collective users and it will be easy for financial institutions and banks to search for any illegal activity associated with any user. Further on, they can disallow the customer from depositing or withdrawing money.
3. Smart Contract
A smart contract means an agreement between two entities in the form of codes that completes automatically after a predetermined set of rules is met. Banks can build trust on both ends by acting as third parties. Smart contracts are tamper-proof and self-verifying. They are already helping banks in numerous ways by allowing P2P deals, full-proof insurance handing out, Error-free audits, and much more. With the help of mortgages, credit letters, or commercial loans banks can strengthen this trust with users.
4. Security
Customer Blockchain technology can make information sharing between financial institutions simpler and safer by keeping customer information on decentralized blocks. There is a lot of security concern that revolves around crypto, many people still are skeptical to use crypto in day-to-day use. Banks can help to comfort the mind of customers by keeping it under their supervision, which will help reduce scams and also help in improving the impression among people who believe that deals involving crypto are not safe.
5. Speedy Payments
Using the decentralized bitcoin payment system. This might make payments easier and more secure. According to a newspaper survey, bitcoin uses 56 times less energy than banks. Blockchain technology provides a cost-effective and speedy mode of payment to central banks when dealing with transactions. Banking software development companies can help to develop solutions for reimbursement and payment rapidly using blockchain technology.
6. Easy backing support and onboarding
Cryptocurrency can help the banking industry in borrowing money at low-interest rates by removing the need for smooth functioning in loans and credit. Cryptocurrencies can make information sharing between financial institutions simpler and safer by keeping customer information on decentralized blocks. With the help of cryptocurrency wallet development, they can build safe wallets for users. On the other side, for those people who are not experienced in handling crypto, bank authorities can help them to activate their wallets. Instead of keeping their funds projection with a third party, they will feel safer and easier to keep their funds with banking institutions.
Impact of cryptocurrency on banks-
One major question people have in their mind is “how cryptocurrency will disrupt the financial system”? Well to say cryptocurrency was introduced to people to change the financial structure. As with the development of cryptocurrency in form speedy transaction, global payments, E-wallets, and many more we can say that it is surely going to change the structure of banks. There are a lot of advancement that cryptocurrency is providing which will improve its practical implementation in the banking industry.
Blockchain, the underlying technology of crypto provides a lot of opportunities to smooth the functioning of stock exchanges, the banking sector, and prompt settlements. The Crypto database and public ledger have the probability to decrease cost, bettering the service, and improve the speed which we talked about for banks. There are a few attributes that cryptocurrency and banking industry both should look after-
1. Facilitating payments-
According to reports, 90 percent of Europe's payment council believe Cryptocurrency will primarily change the banking sector by 2025. There are so many charges and fees associated with sending money from one part of the world to another, fiat transaction fees and bank exchange rate fees. Facilitating payments through cryptocurrency or blockchain will lower the fees which will reduce the burden on people’s shoulders. From 50,000 bitcoin transactions in 2014 to 2,49,000 in august 2022. The bitcoin transaction is everyday increasing working towards using DLT (Distributed Ledger Technology) full potential.
2. Clearance and settlement system-
Making an uncomplicated money transfer nowadays is a headache for customers. Before a straightforward bank transfer may get anywhere, money must pass through several difficult processes, including correspondent banks and regulatory services. Cryptocurrency can break this chain by building a bank-to-bank distributed ledger. This solution will reduce the work of regulatory service providers and correspondent banks by keeping track of the transactions openly on a public ledger. For collateral settlements, JP Morgan chase and cooperation is using DLT in the exchange of traditional financial assets. Ripple and R3 are working with banks to provide effective and efficient service in this sector.
3. Credit and Loan Facility-
Credit and loan facility can take days to process. When you go to any bank for a loan, the bank asks you to fill out a form with complete information. From your credentials to your requirement. So that, they can analyze the risk of the money not coming back to the bank. The background check includes your credit score, income source, and proprietorship status. For this information, they use the data provided by giant credit agencies, where your data always remain unprotected. Such as recently in September 2017, Equifax exposed the credit info of more than 140million Americans. This can be where Blockchain-enabled solutions can offer faster and more secure loan processes to massive customers without the fear of data breaches.
Salt Lending is one such company using blockchain solutions to lend money against any crypto you hold. Your credit score doesn’t matter, only the price of the crypto you kept as collateral will help you to take a loan. The only condition is that the user needs to be a member of SALT which you can become by buying the cryptocurrency SALT and it will allow you in taking out loans.
4. Fraud Prevention-
To prevent fraud, banks keep track of their customers by maintaining their KYC including photo proofs, IDs, Signatures, biometrics, etc. but for banks and customers, it is time-consuming. Sometimes it takes 2-3 months to complete the KYC of people and a survey recently disclosed 12 percent of people changes their banks due to complications and time-taken for KYC. With the customer database management on the blockchain, it will be easy to access the data of the customers. For such a problem cryptocurrency software development company already developed a solution Bloom, which not only keeps the database safe but also scans the internet thoroughly and continuously to prevent any information leakage.
With the details, you already got a good overview of how cryptocurrency and its technology. Blockchain can be used by banking software development company to develop services that safeguard the functionalities provided by the banking sector.
Conclusion-
Cryptocurrencies are becoming more popular, but they still need to be developed and evaluated by banking sector to be ideal solutions. Many investors and supporters of cryptocurrency think that blockchain technology will benefit the banking industry and eventually replace traditional banking services. Financial markets will surely see a transformation with the help of DLT. Organisations are coming up with new solutions which will surely equalize access to private assets and financial services and enable tokenization to make investment more varied and affordable.
Author Bio
Rohan Singh is a Chief Executive Officer at SemiDot Infotech, a top-rated multi-award-winning mobile application development company that provides a full suite of services and solutions to SMEs & large-scale enterprises as well as new start-ups.
He has extensive experience working for multinational companies and knows what it takes to take a company to the next level. He has a master’s degree in computer science and has gained an understanding of several ground-breaking technologies that help him to write about them. If you want a guide to Blockchain development or any other technology, you can visit our blogs to get knowledge.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.