Cryptocurrencies and financial institutions: still a long way to go

Three things that define today’s endless expansion of the world are the movement of money, people and information. 

So what is so intriguing about money being transferred from one person to other over the digital universe that makes it a whole industry of its own? There exists a huge disruption in the whole monetary and banking industry of today. 

One major disruption in this realm was the invention of the cryptocurrency such as bitcoin which uses the p2p (peer-to-peer) network to transfer money from one user to the other.

Unlike normal digital payments which require a bank account, cryptocurrency payments do not need a bank account and are wired over to users digitally with transactions being lodged securely in a public ledger using a methodology called as blockchain.

The market capitalisation of the cryptocurrency industry changes dramatically because of the high volatility, but is estimated to be just over US$13.5 billion. 

Despite the overwhelming growth of the industry, there is still a lot of skepticism among major financial institutions towards the adoption of the newfound technology for use in their payment gateways. Here are some reasons why:

 

There is no need to hold a bank account 

The usage of cryptocurrency-related payment mechanisms don’t require a user to hold a bank account. These currencies are stored digitally in a virtual account or e-wallet and are transferred from one virtual account to another over the network.

Large financial institutions traditionally tend to have a certain amount of control over their client’s assets through the use of accounts. So when their clients start using cryptocurrencies that do not require an account with them, what happens is a shift in control over client's assets.

 

Conversion to traditional currency incurs cost

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The digital currency only "exists" in the digital world. In order for that currency to be used in the physical world, it needs to be converted to universally accepted currencies. There are transactional costs involved to process these conversions. Financial institutions might not be willing to bear these transactional costs.

 

Regulations are still not comprehensive enough to accomodate them

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While the expanding cryptocurrency market has the potential to revolutionise the way money is transferred or exchanged, its introduction to the global venues is fraught with challenges and pitfalls. Because virtual currencies are not recognised across the global marketplace yet, developing a standardized approach for their use is critical.

The current state of regulations are still in its infancy and do not warrant the need for the use of cryptographic measures for the transfer and use of money. This in turn creates a lot of inhibitions among the larger financial industries towards the adoption of digital currencies.

Additionally, there is a valid concern in the financial world that digital currencies are used as a means for laundering money. This arises primarily from the lack of understanding of the procedures involved in cryptocurrencies. Although, there have been instances of a breach of security measures in the digital currency world, but a more broader outlook will be needed to understand the complexity of the digital currency money transfer.

 

Accountability

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Due to the unregulated nature of the digital currencies and a lack of a centralized authority to monitor the exchange of such currencies there is a high degree of skepticism involved in the accountability of transactions carried through the cryptocurrency network.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex (and in some cases impossible) to track.

Though there exists a plethora of opportunities in the world of digital currencies, unless government organizations formalise the entire structure of monetary transactions involving digital currencies, there would be a long wait time for financial institutions to get involved in it. 

(By Rupam Shome)

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