The global financial crash in 2007 was the catalyst for the creation of Bitcoin. Designed to provide a decentralised way in which people can manage their own money, digital currencies slowly infiltrated the greater financial markets.
Almost a decade later, crypto adoption is at its highest and for the first time challenging traditional financial institutions and their product range. So, which is better? Let's explore the pros and cons of each category.
Blockchain technology has seen an incredible increase in interest in the last few years. While it provides a universal backbone relevant to almost any industry, it has also brought the world cryptocurrencies, NFTs, decentralised finance (DeFi) and other digital assets.
Tackling existing centralised monetary challenges, blockchain technology and digital currencies are two of the greatest inventions of the 21st century.
Digital currency versus banking
Cryptocurrencies are decentralised digital currencies that can be used to exchange goods and services as well as a store of value. They're typically acquired through crypto exchanges and kept in secure crypto wallets. These virtual currencies are autonomous, operate in a secure manner with little human interaction, and are increasingly considered the future of finance.
The predominant financial systems in the world are currently banks. They provide financial services to those that meet their requirements, including loans, savings, and other financial services.
However, unlike cryptocurrencies, they have several problems core to them being centralised and susceptible to biases. They're also slower than cryptos, and some of them charge exorbitant interest rates on loans as well as routine purchases.
The pros and cons of the banking system vs digital currencies
There has been little development in the banking sector in the last several decades, so while the products are useful there has been very little innovation in the space. Below we outline the current challenges that the traditional systems face when compared to the advantages of a digital currency.
Banks are notorious for requiring lengthy paperwork and in-depth background checks. They are also known to provide different products and limits to different groups of people, including payment durations, soft loans, limits, etc.
When creating the digital currency Bitcoin, Satoshi Nakamoto wanted to counteract this financial inclusivity pertaining to fiat currencies and the greater financial system and instead provide a financial product available to all. Cryptocurrencies, therefore, do not require any paperwork or identification to operate or open a digital wallet.
While buying digital assets on an exchange will require personal information, they do not require any background checks or credit scores. Unlike in the traditional financial system, engaging in crypto markets is also not exclusive to location, allowing anyone from any corner of the globe to immediately access the digital payment systems.
Banking institutions operate within certain hours and are closed on weekends, meaning that transactions can sometimes take days to clear. They will also typically require an in-person authentication for very large transactions, and affect the remittance markets in the global financial system.
Cryptocurrencies on the other hand operate 24/7 (even on public holidays) as they are maintained by members all around the world. Cryptocurrencies provide zero downtime with unlimited amounts and do not require third-party authentication before making transactions. One digital currency can send value to the other side of the world in minutes, requiring no in-person authentication.
The banking industry, particularly online systems, are susceptible to being hacked, alongside fraudulent activities and money embezzlement. While this is not always the direct fault of the central bank or financial institutions, it has become a common problem as ill actors have learned how to navigate the security systems and trick the owners of these accounts.
Through the use of blockchain technology, transactions cannot be intercepted or reversed, and are handled in a peer-to-peer nature ensuring that they do not go through a third party for authentication and require minimal human interference. This eliminates the chance of blockchain networks being hacked significantly, however, cryptocurrency exchanges are still suseptible to hacking incidents. Always ensure that you use a reputable cryptocurrency exchange if engaging in the digital asset market, and ensure that the platform is licenced and regulated.
Fees and transaction times
During transaction periods, banks often add on extra costs and taxes. When sending and receiving money, banks frequently charge very high transaction fees and taxes, especially when conducting international remittances. These transactions also take a long time to clear due to their sluggish procedures, especially for large amounts of cash.
Cryptocurrencies provide an favoured solution to the remittance markets as they provide fast and cheap transactions. Blockchain technology ensures that they clear in several minutes (depending on the cryptocurrency and the network’s congestion at the time) and that they are sent directly to the recipient’s wallet (as opposed to waiting for the receiving bank to clear the transaction).
Traditional banking services generally lack significant diversification options due to their competitive pricing structures. However, cryptocurrencies enable users to engage with multiple products simultaneously, which can provide opportunities for leveraging various networks and creating portfolios with reduced risk concentration.
Another advantage that blockchain currently holds over traditional banking systems is the use of smart contracts. Smart contracts are digital agreements that automatically execute once predetermined criteria has been met. Leveraging smart contracts in the financial services industry offers a seamless and entirely decentralized approach to modern banking.
Which is better: the central bank or digital assets?
Comparing central banks and digital assets reveals intriguing aspects of both systems. Banking systems have become an integral part of modern society, underpinning economies and facilitating everyday financial transactions. They offer stability, regulatory frameworks, and familiarity to the masses.
On the other hand, cryptocurrencies introduce a realm of innovation. Their decentralized nature challenges traditional financial paradigms, enabling secure and direct peer-to-peer transactions. Additionally, cryptocurrencies empower novel applications such as smart contracts, decentralized finance (DeFi), and tokenisation of assets.
Selecting one over the other isn't straightforward due to their contrasting strengths. Central banks provide stability and a well-established foundation, while digital assets spark possibilities for disruption and financial inclusivity.
Presently, these financial systems coexist synergistically. The banking system maintains its role as a bedrock for economic operations, while digital assets complement this by offering alternative avenues for value exchange and financial exploration. As both systems continue to evolve, it's likely that their interaction will shape the financial landscape in intricate and unexpected ways.
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