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Will Crypto and Blockchain Replace Banks?

Why it matters to you:
As a cryptocurrency investor, enthusiast, and active member of the community, you must be wondering about the long-term future of cryptocurrencies. Will they replace banks and national currencies one day? Is this realistic? We explore this complicated topic in more detail in this article.
How and why was Bitcoin created?What’s the role of central banks and fiat currencies?Could Bitcoin replace banks and fiat currencies?

As we covered in a previous article, in September 2021, El Salvador became the first country in the world to accept Bitcoin as legal tender. Also, we published what you can buy with Bitcoin. Soon, we will see just how many companies now accept Bitcoin and other cryptocurrencies as a means of payment. In the same way that you can pay with Visa, MasterCard, cash, or credit. 

Over 300 million people around the world invest in, trade, exchange, and make purchases using cryptocurrency every day, according to recent data. 18,000 businesses now accept Bitcoin and other cryptocurrencies as a payment method. 

Do these trends mean that cryptocurrency could replace banks and fiat currency? 

Answering that question requires a quick history lesson. 

How and why was Bitcoin created? 

Back in 2008, the world was plunged into a severe recession—the worst since 1929. Millions of people lost jobs. Businesses closed. Even banks and investment funds collapsed. Dozens of central governments were forced to give the largest banks investment-backed loans to prevent an even more widespread and destructive recession. These banks were deemed “too big to fail.” 

In Europe, many countries were plunged into austerity measures. The International Monetary Fund (IMF), European Commission (EC), and European Central Bank (ECB) had to take extreme steps to support failing countries, such as Greece and Ireland. It was a devastating and difficult time for millions around the world. 

In response to this economic catastrophe, a person (or group of people) using the name Satoshi Nakamoto published a white paper online outlining the concept of Bitcoin in 2008. Bitcoin is a peer-to-peer decentralized currency, free from central banks and the restraints of fiat currencies. Bitcoin operates on a decentralized blockchain-based database. 

Nakamoto and those in the founding group were libertarian-minded Internet activists. They wanted to break free from the destruction Wall Street banks, hedge funds, and even central banks had caused to the global economy. Bitcoin was seen as a way to achieve that, and ultimately, the foundation of what could replace banks and fiat currencies in the future. 

Unlike Occupy Wall Street and other activist movements, the creators of Bitcoin were taking action that could overturn the financial system that caused so much misery. 

Over 13-years later, we have to ask, could cryptocurrencies replace the financial system? 

What’s the role of central banks and fiat currencies? 

Central banks issue fiat currencies. These currencies are trusted and acceptable around the world, as ultimately the government of the country a currency comes from acts as the backing entity. Central banks play a huge role in national economies. 

Central bank policies can stimulate economic growth. Investments, savings, consumer spending, and the property market are all influenced directly by central bank policies. Central banks also encourage foreign direct investment (FDI), imports, and exports. 

Before the U.S. Federal Reserve was created in 1913, money (US Dollars) was issued in different states by non-bank entities, such as merchants and municipal corporations. Exchange rates varied widely. Many of these entities were run by frauds. Bank runs (where account holders tried to withdraw all of their money quickly) and panics caused mayhem in the U.S. economy. 

None of that is possible without central banks. 

In 1944, the U.S. government changed the way fiat currencies interacted with Gold. Before The Bretton Woods System was created in 1944, the US Dollar was tied to gold. So were other fiat currencies. Once that system was replaced, central governments and banks could simply print more money—paving the way for massive economic stimulus programs without the need to mine or acquire more gold. 

Except that’s not possible with Bitcoin and other cryptocurrencies. With every cryptocurrency, there’s an upper supply limit. Once the total supply limit has been reached (21 million, in the case of Bitcoin), there can’t be any more mined. 

Although in theory, a supply limit makes cryptocurrencies more viable, it could be a serious drawback when it comes to the potential to replace fiat currencies. 

Could Bitcoin replace banks and fiat currencies? 

Investor appetite for Bitcoin and other cryptocurrencies is growing. As mentioned earlier in this article, over 300 million people now invest in and use cryptocurrencies. Bitcoin is the largest of them. It’s now seen as an attractive portfolio diversification asset, capable of generating impressive out-sized returns.

However, there is a big difference between Bitcoin becoming popular with investors (thanks to ETFs) and cryptocurrencies replacing central banks and fiat currencies. 

Whether Bitcoin can replace banks and fiat currencies is a complex economic, social, and technical question. Bitcoin has numerous advantages which are hard to ignore, such as: 

  • Secure. Every Bitcoin is cryptographically secured on the blockchain. Making it impossible to hack, counterfeit, or spend more than once. You can trade and exchange them, but you cannot replicate them. 

  • Trustworthy. Bitcoin is decentralized. Operating on a public blockchain-based ledger, every transaction needs to be verified and confirmed by multiple nodes on the network. A single disagreement between nodes makes a transaction ineligible. Instead of central control, this decentralized public ledger increases the trust people place in Bitcoin and cryptocurrencies. 

  • Peer-to-Peer (P2P). Anyone with a computer and the right open-source software can create (mine) Bitcoin and cryptocurrencies. Eliminating the need for a central bank and network of banks to create and distribute currency. 

Despite the numerous advantages and over 300 million users, there are several hurdles Bitcoin would need to clear to replace central banks and fiat currencies: 

  • Widespread adoption. Bitcoin and other cryptocurrencies would need billions more users to gain the same level of trust and reliability as fiat currencies. 

  • Regulation. In order for the general public to trust Bitcoin as much as fiat currencies, a minimum level of regulation from financial regulatory bodies (such as central banks, the SEC, etc). Would this forever change Bitcoin as we know it? Potentially, yes. Whether this would enable widespread adoption is debatable. 

  • Legality. Regulation and Bitcoin moving out from under a legal cloud in many countries (especially China and America) is essential for cryptocurrency to achieve widespread adoption. 

Bitcoin replacing fiat currencies and centralized control is absolutely possible, in time. There are pros and cons on both sides. It’s a complicated and multifaceted question. Over time, we will see the answer come to light.

Published: Jan 28, 2022
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