Cryptocurrencies are gaining popularity. The underlying technology, blockchain, is being used for various applications. One of the biggest potential applications will be in the banking sector. Banks are archaic and blockchain is ready to disrupt the mammoth sector with innovative solutions that bring efficiency and transparency in operations as well as providing features that a traditional bank would never be able to.
There are quite a few projects like Monaco that have the aim to disrupt the banking and payments sector while new generation projects like FOTON bank have a focussed approach on a much wider net of banking services. Foton bank’s team envisions to provide a complete suite of banking services including a virtual card like Monaco. Let us look at how an ideal cryptocurrency bank can disrupt this market. Some other projects vying for this market are World Bit Bank, My Crypto Bank, European Crypto Bank.
What are Crypto banks?
With the rising popularity of smart contracts on popular platforms like Ethereum, a completely autonomous organisation or a platform with complex banking capabilities is not too far in the future.
Crypto banks are essentially decentralised platforms that can fulfil all the functions of a bank without a mediator. A crypto bank would ideally have following features:
Provide users with accounts. These accounts, although similar to traditional bank accounts, will be completely in control of the user. Even if the platform or the crypto bank shuts its operations, users do not lose their funds.
Anonymous or Identified
A crypto bank can provide the option to keep user data anonymous or link them with their identity by way of KYC procedures.
Business or Personal account set up
It would provide a business or a personal account enriched with relevant services. A business account would feature a multi-sig wallet, a stable coin, provide acquiring service and many other features that would make a traditional bank look primitive.
A business account could be connected to Payroll, payments, invoicing systems and taxation. Many states in the US and countries have started accepting taxes in crypto tokens and this trend is only growing by the day.
Payments and transfers
More businesses are accepting crypto payments and implementing payment gateways to collect them. A good crypto bank would streamline remittances, payments and transfers across geographies. It would not only facilitate crypto transfers but also conversion to and from Fiat.
Credit facility and Peer-to-Peer lending
A crypto bank would also provide credit and lending facilitated by blockchain-based open market. Such facilities would be transparent and interest rates would be determined by the market.
Virtual card and Mobile application
A crypto credit card is the holy grail of crypto payments. This will simplify payments for those who aren’t savvy enough to use a wallet and secure their own funds. A mobile application for digital payment would enable instant peer-to-peer transactions.
Low service and transaction cost
Last but not the least, it would eliminate most of the service and transaction costs. Banks employ thousands of people to perform tasks that would be redundant with a blockchain. Cost of providing service is a major cost head in banks.
Transaction costs on a blockchain are very low compared to the banks and this would ultimately benefit customers using a crypto bank.
Why do we need crypto banks?
Digital payments are on a rise. It is widely accepted that payments will move on a digital medium and blockchain is at the core of this transformation. As adoption of cryptocurrency rises even in a bear market, more traditional banks are testing cryptocurrency remittances and even more startups are using blockchain to disrupt legacy systems in various sectors. Banking sector is no different except the fact that the opportunity is humungous.
One of the reasons for the popularity of cryptocurrencies is the bureaucracy and friction in the traditional financial systems and banking is no different. Here are some of the problems that a crypto bank can solve:
Advantages of Crypto Banks
Crypto banks are much more flexible and nimble. The underlying technology provides it with the power that will make traditional banking system obsolete. Here are some of the major differentiating factors:
No Regulatory burden
Regulatory burden makes the banks slow to respond to customers changing needs. Banks need to wade their way through a complex mesh of rigid rules which often affect their ability to serve their customers best.
Crypto banks work on a decentralised platform with very little regulatory friction. If a crypto bank is sufficiently decentralised by incentivising users to host nodes and masternodes, it can operate in a country that has a friendly regulation.
Banks often have limits and elaborate procedures for simple transfers and customers end up suffering. There are no limits when it comes to crypto transactions.
Crypto transactions are known for their low cost and fast transfers. Transfers worth hundreds of millions of dollars would cost less than a dollar when done via Bitcoin and will be as fast as a handful of minutes. No bank can ever compete with such efficiency.
Banks have been known to be hacked and supply information to banking bodies. There is an increasing sense of loss of privacy in the sector.
Bitcoin has proven that the blockchain technology, when implemented at scale, has stood securely for over ten years now. Also, the factor of anonymity with transparency sets blockchain aside. A person or business can transfer funds from one wallet to another with a public entry on the distributed ledger but without revealing their identity.
This is the biggest differentiating factor. While it feels like we are in control of our funds, that is far from truth. Banks can stop transfers, freeze accounts and monitor every move.
Crypto’s decentralised structure makes sure any person, business or even government cannot control it or shut the network down. Many big governments have tried banning Bitcoin and cryptocurrencies without any success. This has led them to the only choice of adopting it and regulating it to an extent of curbing the illegal activities using crypto payments.
Availability and dependence
Banking service is subject to working hours, customer support hours, holidays and there is a strong dependence on the central bank that specifies an arbitrary rate of interest which can be changed any time.
A decentralised banking platform will be available 24×7. Equity markets have working hours but crypto exchanges operate 24×7. A banking platform on blockchain will operate similarly. Also, for a peer-to-peer platform, interest rates and other fees could be determined by the forces of free market. Peer-to-peer lending platforms already work better than the lending model governed by central banks where banks work as a middlemen and employ hordes of staff to complete the procedures and execute every transaction.
Scenario of Crypto Banks
Monaco has made a foray in this market by partnering with Visa and releasing a product in multiple geographies. But their narrow focus only on payments makes them more like PayPal for crypto rather than a comprehensive banking platform. Their recent rebranding to Crypto.com is a step that indicates their focus solely on payments.
A relatively new player, FOTON bank, looks much more promising and has the right focus. A platform like FOTON bank has the potential to be an integrated banking system on blockchain. The project is designing a decentralized crypto-bank for multi-currency trade with a Fiat to cryptocurrency exchange and instant payments made contactless by NFC delivered across the world. It aims to create an ecosystem that will help provide banking services for financial assets, exchange, virtual cards, business and accounting services at scale. FOTON bank aims to develop its own cryptocurrency exchange and an interbank ecosystem which eliminates the need of intermediaries. It is powered by the Light in-house blockchain with capabilities to deliver financial solutions and handle customer service processes.
FOTON bank works without intermediaries with its own cryptocurrency exchange and interbank ecosystem powered by the Light in-house blockchain technology combining finance and customer service processes.
Banking industry is ripe for disruption. Blockchain and cryptocurrencies are knocking at the gates and the former guardians of the industry have started joining the movement. The efficiencies brought in by this technology can no longer be ignored. These would be at the core of the next banking revolution.
The future belongs to code-governed open markets that do not require human interface for every transaction or determination of rates of trade. A completely automated decentralised platform with a strong governance model is the future of banking. Such a platform would not only work with cryptocurrencies but provide a full range of support for Fiat, stable coins as well as cryptocurrencies.
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Written by ~ Amrit Mirchandani