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Friend or foe: Could cryptocurrency transform banks or destroy them?

Ross Chalmers

“Chancellor on brink of second bailout for banks.” This was the quote included by Satoshi Nakamoto when he/she/they released Bitcoin to the world. The 2008 Financial Crisis was taking place and there was fear and panic in the mainstream about whether the nations affected would be able to recover. Since then, in the UK, we have had years of austerity as the government attempts to cut back its budget, whilst at the same time central banks print more and more money. With banks seemingly changing their tune about cryptocurrencies and the vast array of different aims within the cryptocurrency industry, is cryptocurrency in banks friend or foe? Bitcoin – the foe For many Bitcoiners, they have one aim: to replace

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“Chancellor on brink of second bailout for banks.” This was the quote included by Satoshi Nakamoto when he/she/they released Bitcoin to the world. The 2008 Financial Crisis was taking place and there was fear and panic in the mainstream about whether the nations affected would be able to recover.

Since then, in the UK, we have had years of austerity as the government attempts to cut back its budget, whilst at the same time central banks print more and more money. With banks seemingly changing their tune about cryptocurrencies and the vast array of different aims within the cryptocurrency industry, is cryptocurrency in banks friend or foe?

Bitcoin – the foe

For many Bitcoiners, they have one aim: to replace the current financial system as we know it. There are a few key differences between Bitcoin and the current financial system. Firstly, Bitcoin is decentralised and not reliant on a third party such as the banks themselves, be they central or commercial. Secondly, Bitcoin is deflationary instead of inflationary – a distinct difference to the way fiat money currently works.

There are arguments on both sides over what gives both the dollar and Bitcoin value. Both sides argue that they are both inherently worthless. The dollar is the global reserve currency thanks to the fact that it is essentially backed by oil. All oil purchases nowadays are made in dollars. US citizens also pay their taxes in dollars and it is supported by the government. Bitcoin is supported by maths in the mining algorithms.

Whilst both sides can argue that neither the dollar or Bitcoin provides value, what ultimately gives them both value is that people believe in them to one extent or another. Bitcoin wouldn’t be worth what it is now if people didn’t believe in it, and the dollar would be useless if one day everyone suddenly gave up hope in it as well.

Bitcoin has extremely ambitious goals and is definitely a foe of the banks, as well as the nation state system itself. Whether Bitcoin will be subsumed by the banks or help in their downfall is yet to be seen.

Ripple and Stellar – cryptocurrency in banks

Ripple and Stellar are two cryptocurrencies that take a vastly different approach to Bitcoin. Rather than being an enemy of the banks, these two are attempting to cosy up to the major banks in the hope of improving their services. Through their technology, they claim that they can make international payments much cheaper and much faster. Both Ripple and Stellar receive a lot of criticism form Bitcoiners for a variety of reasons, but one key issue is their differing philosophies.

Whilst Ripple has been keen to highlight the many testing partnerships it has managed to establish, there is still a lack of evidence to say whether banks will truly embrace its technology. Stellar is in a similar situation, but has recently announced that IBM’s “World Wire” will incorporate Stellar’s technology.

Whether banks will embrace using a third party to help with international transfers is arguable, and there are signs that they would rather control the technology themselves.

Banks creating their own cryptocurrencies

News emerged in recent months that JP Morgan was launching its own “JPM Coin”. This is the same JP Morgan who’s boss, Jamie Dimon, has consistently lambasted Bitcoin as being a fraud. The coin is anticipated to instantly settle payments between clients.

JP Morgan is not the only bank investigating the use of such technology though. Many other banks, both commercial and central, are also exploring the use of blockchain technology. Even nation states such as Venezuela have released their own cryptocurrencies, such as the “Petro”.

Whilst banks are starting to incorporate blockchain technology and the idea of cryptocurrencies, there seem to be few benefits. Whilst the technology may reduce the costs for banks, these savings might not be passed on to the consumer.

The endgame may not even be cryptocurrency in banks as we know it, but rather an offshoot of a centralised permissioned blockchain, similar to a database.

Conclusion

The majority of cryptocurrencies are not friends of the banks. Whilst the idea that Bitcoin will one day replace the traditional finance system might seem improbable, that is the intent.

Cryptocurrencies themselves have relatively few benefits for the banks in the long run. The use of third parties such as Ripple or Stellar would lessen the banks’ own control, and the current system works well enough for banks to rake in massive profits anyway. The new interest in blockchains and cryptocurrencies could merely be a form of PR in an attempt to look like they are “advancing”.

Cryptocurrency in banks has some way to go to make it appear like it could be a symbiotic partnership, but it isn’t necessarily something you should count on.

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