Banks Are Finding A Way Around Decentralization

To many, cryptocurrency remains the biggest threat to the traditional banking sector. This sentiment is borne out of the fact that crypto technology introduces a variety of functions that easily overrides the limitations of conventional financial systems. That said, the recent developments registered in the crypto space tells a different story. Crypto is fast becoming an important tool for banks looking to strengthen their grip on the global financial landscape. While this revelation completely contradicts the notion that brought crypto to the fore, it, however, helps us project the prospect of cryptocurrency in the coming years.

As such, this article will fixate on crypto’s budding status in the financial industry, and what it means to the average crypto enthusiast.

No Love Lost Between the Banking Industry and The Crypto Economy

In the early years of crypto’s short history, bitcoin came off as a laughable addition to the growing number of innovations that hoped to challenge the dominance of banks. Before this, inventors had suggested various ways to create virtual currencies, albeit with little or no success. Then came the mysterious whitepaper that introduced the workings of cryptocurrency and the first product to adopt its disruptive features – bitcoin.

Bitcoin offered way more than critics had originally anticipated, as it infused elements of autonomy that had no place in the existing banking industry. It also explored decentralization like never before by ensuring that central authorities had no say in the operations of the network. More impressive is the level of transparency this network avails with the help of blockchain and its immutable ledger. Likewise, encryption-powered cryptography adds to cryptocurrency’s efficacy as a secure medium of transaction.

Before long, people began to see the remarkable capabilities of bitcoin, and its protocol served as the blueprint, which helped cryptocurrency find its footings as a viable alternative to fiat currencies. All through this period, the banking sector stood by the sidelines, watching with disinterest, since history had always favored its dominance. However, bitcoin and the rest of the crypto market continued to record an upward trajectory that was enough to announce its disruptive nature to the global community. And since the aftermath of the bull run in 2017, the crypto space has witnessed a steady wave of crypto products that had one or more centralized financial institutions backing them.

It is worth noting that many of the traditional banks flirting with crypto technology chose to focus on the blockchain, rather than encapsulate the entirety of the technology. Needless to say, this contributed to the blockchain frenzy in 2018 that has since lost its buzz in 2019. On the other hand, Institutions that had embraced crypto as a whole are coming to the fore. This development is enough to make the average crypto enthusiast excited about the prospect of cryptocurrency. Nonetheless, a closer look at the current trend reveals a trope contradicting the narrative that drove cryptocurrency’s emergence as a formidable alternative to traditional systems

Back then, crypto – or perhaps the entities driving its adoption – promised a future that would open up the financial landscape to startups that are concerned about the interest of their users. The well-crafted marketing propaganda explained how banks would eventually fall off the pinnacle of the financial service industry, to be replaced by more capable solutions that would thrive on the concept of decentralization. Make no mistake, decentralization was the major benefit of the financial market brewing within the crypto space.

However, from what we have witnessed so far, there is a reason to doubt this eventuality. Financial powerhouses are doing all they can to stay a step ahead of the narrative. We see this manifest when JP Morgan Chase introduced its crypto product. The same is true of Goldman Sachs-backed Circle, which the company hopes would serve as a stabilizing tool for the ever-fluctuating digital asset market.

The Crypto Community’s Affinity for Centralization

The growing dependency on the acceptance of crypto by traditional entities is a worrying development. It is funny how a market that had once thrived with or without the input of legacy companies now craves validation from the same entities that had contributed little to its ascendancy. An example is 2018’s price tumble that followed rumors that Goldman Sachs had ditched its plan to introduce a crypto product. This assertion does not downplay the benefits of having the so-called big guns join the crypto party train. It does explore the threats that might accompany an influx of centralized entities in the crypto space. Can startups, vying for the same market as legacy companies, survive the onslaught, knowing fully well that they lack the kind of customer base to challenge the status quo?

Moreover, it is unlikely that a market leader like JP Morgan Chase, which had thrived at the expense of transparency and autonomy would create a crypto product without putting one or two components that will ensure that it controls the operations of the network. This is unlike what we have come to revel in Bitcoin, and it might just define the new breed of cryptocurrencies that are finding their roots in the crypto economy.

One could argue that this has always been a threat, seeing that cryptocurrencies that are not named bitcoin have found it a tad difficult to break glass ceilings. Bitcoin has championed the crypto narrative, and no other cryptocurrency had exhibited the same level of consistency to challenge its title as the king of cryptocurrency. The only payment solution that had come close, XRP, takes a different approach, which has limited its status in the crypto community. Centralization features in this crypto, a similar crypto model you would expect from a typical legacy company.

Owing to the lack of competition at the top echelon of the crypto payment solution market, it is not surprising that projects like JPM coin and Libra are coming to the fray. Interestingly, the proliferation of enterprise-backed payment coins has spurred the intensity of talks relating to central bank-based crypto. There are reasons to believe that governments are becoming aware of the financial power that these projects avail their initiators. As such, they have no other choice but to curtail the insurgency through regulatory frameworks or create cryptos that would compete with them.

Central Bank’s Crypto Foray

One of the developments showcasing crypto’s influence in the global financial system is its growing attractiveness as a nationally backed currency. This phenomenon became less of a myth in 2018 when certain countries explored the possibilities of state-backed cryptocurrencies. Though only one of these countries went ahead with its crypto project, nonetheless, these events served as a reminder that crypto as a concept would eventually attain mass adoption. Whether this much talked about adoption would align with the core principles that birthed bitcoin is yet to be seen.

Following the announcement of Facebook’s crypto project, central banks have responded in diverse ways. Governments are leaning towards strategies that would ensure that their local currencies do not collapse from the weight of the project’s innovative reach. Most notable is China’s move to implement a state-backed cryptocurrency, which pundits expect would help the country to expand its influence in the global economy. While it is clear that cryptos, similar to the one that China is proposing, will continue to pop-up, even as central banks try to adapt to the changing tides, it is, however, not clear if decentralized cryptos will command the same level of demand.

For one, once crypto becomes the bread and butter of enterprises and central banks, there is the possibility that decentralization might take a back seat. On the other hand, one could argue that the influx of centralized cryptos would make decentralization far more attractive. Individuals will come to see the real value of the economic freedom that decentralization avails. If this assertion holds, then the demand for cryptos like bitcoin will continue to soar.

Another reason why decentralization might retain its efficacy, even after centralized cryptos storm the market, is that crypto’s validity as an investment vehicle depends on decentralization. Why do you think institutional investors are increasingly allocating a fraction of their funds to crypto investment? From recent reports, it is clear that investors are beginning to see the essence of utilizing bitcoin to diversify their portfolios. The core reasons for this are as follows:

Decentralized Cryptocurrencies Have Little or No Correlations to Traditional Markets

Bitcoin’s main talking point is its low correlation to traditional asset classes. Hence, investors could allocate a percentage of their wealth to crypto to reduce the risks associated with adopting rigid investment strategies. While this is a given, the same cannot be said of cryptos pegged to traditional assets, like the ones central banks are initiating. Although centralized crypto could challenge bitcoin in the payment solution front, they will, nonetheless, face an uphill task to usurp its demand in the investment scene.

Decentralized Cryptocurrencies Take Advantage of The Economic Benefits of Scarcity

Many of the decentralized cryptos available today utilize one form of scarcity-inducing function or the other that will ensure that the volume of new cryptos created decreases with time. In other words, bitcoin halves the amount of new coin mined every couple of years. Likewise, a majority of decentralized cryptos enforce a cap on the maximum number of coins that can be in circulation. For instance, once the circulating supply of bitcoin hits 21 million BTC, the mining of bitcoin will officially cease.

This function introduces a basic supply and demand concept to guarantee that bitcoin remains valuable. On the other hand, centralized cryptocurrencies utilize a model that allows the central authority to dictate the generation of new coins, just as central banks determine how much fiat currencies are in circulation. In the end, it is safe to say that such cryptos do not have the right technology in place to tackle inflation.

Unfortunately, centralized cryptos are not the only threats to the prospect of decentralization in the banking and payment solution space. These digital assets have to battle a new breed of payment solutions that are far more rooted in the traditional financial landscape. One such solution is Google’s collaborative effort with Citigroup to create a checking account called Cache. According to Google’s executive, the tech company’s “approach is going to be to partner deeply with banks and the financial system… It may be a slightly longer path, but it’s more sustainable. If we can help more people do more stuff in a digital way online, it’s good for the internet and good for us.”

Subsequently, experts believe that the downturn of the price of bitcoin below the previously held $8,500 threshold is an aftermath of the announcement of Google’s latest product. Even a report published in Forbes went as far as to proclaim that Cache could kill bitcoin.

While this is not the first time such proclamations had threatened to put an end to bitcoin’s successful run but to no avail, nevertheless, it is imperative to remain nervy of the explosion of tech enterprise-backed payment and banking solutions. This assertion holds considering Apple’s alleged partnership with Goldman Sachs to launch its credit card. Also, recall that Amazon is offering its users banking services through personal accounts. Then, there is Uber, which is tinkering with banking features to provide credit and bank accounts to its users.

The nature of these projects suggests that tech giants are jumping at the opportunity to capitalize on their massive user base to disrupt the financial industry. Instead of towing Facebook’s approach, these companies have opted to base their solutions on traditional models that contradict everything that cryptocurrency stands for. These companies are not willing to bend their rules for the sake of validation. Instead, they are quite certain that regardless of the controversies surrounding their propensity to toy with users’ privacy, people will continue to use their platforms.

For developers in the crypto space, this serves as one more reason why they should intensify their efforts to establish crypto’s viability as a payment facilitator. To do this, they must continue to promote the decentralization narrative, albeit with an element of innovation. Needless to say, a startup offering a centralized crypto payment solution has little firepower to compete with established offerings like the one JP Morgan and Facebook are proposing. Hence, decentralization is currently the only playing field that crypto firms can claim to have the upper hand, and so they must start capitalizing on this.