The narrative of crypto can be summarized by the following statement: Unbank the banked and bank the unbanked. Well, let’s have a realistic look at the topic.
Power goes hand in hand with controlling money
Historically, governments have the biggest power in their countries. Countries usually have central banks and a lot of commercial banks. Central banks are responsible for monetary policy while commercial banks serve people and businesses. Governments and banks should be to some extent independent. There are always people in leadership positions of institutions and they naturally strive to have power. Within the last few decades, new influential players slowly appeared. Due to the internet and many technological advancements, big IT companies become very strong international entities. Companies like Google, Facebook, Twitter, Amazon, Alibaba, and many others are international and have more information about people than governments have. How did it happen? Well, the fact that the internet is a global network allowed locally successful companies to become global players quite fast. While the decision power of governments is mostly limited to their countries, big IT companies have begun to control literally the whole world. As you could probably hear, information is the gold of the new era. These companies know well how to commercialize information. Now, we are in a situation when social media are accused of influencing the election of the US president, they can legally censor tweets of politicians, or even try to create their own global currencies. Facebook still works on the Libra project and it is possible that we will see it in some form. We can observe a quiet struggle for power between governments, banks, and big IT companies.
The most important message from the previous paragraph is that technological advancement can blunt the power of governments and give advantages to owners of technologies. Cryptocurrencies can be perceived as a technological invention that stepped in into the struggle for power. In contrast to governments, banks, and big IT companies, cryptocurrencies are naturally decentralized. We stated in the beginning, that power goes hand in hand with controlling money. Does it mean that when we begin to use decentralized money then nobody will have power? No. Some people and entities will always struggle to usurp power. Thus, when they want to usurp power, they will need to somehow control cryptocurrencies. Banks are definitely entities that will struggle to control money regardless of whether it is fiat money, Central bank digital currency (CBDC), or cryptocurrencies.
Are currently commercial banks really threatened by cryptocurrencies?
Let’s have a look at the current situation. The most adopted cryptocurrency is Bitcoin. Commercial banks decided to resell Bitcoin to big investors. It means that they have created cryptocurrency custody services. For banks, Bitcoin is just a new business and also investment opportunities. Is it good or bad? Both. It is great that big companies buy bitcoins as a hedge against printing money. The narrative about a new digital gold slowly becomes the reality and it can be expected that others will join the club. There is one negative aspect of that, though. Rich players buy bitcoins to ensure that they will stay rich. A very small group of early-adopters that holds bitcoins or other cryptocurrencies now can maybe become rich as well. The negative aspect is that bitcoins will become very expensive for the majority of people on the planet if they are not expensive already. Thus, the majority will have basically no reason to join the club. People generally do not care about hedging. They do not buy gold since many of them do not understand the mechanics behind scarcity and demand in turbulent times. By some research, approximately only 15 % of the population in the USA holds gold. Gold is not a currency and it is not even used to back fiat currencies. In the case that Bitcoin will become a new publicly accepted digital gold, it can remain a digital hedge forever without the ability to become a stable global currency. It is actually difficult if not impossible to have a scarce resource and currency in one single asset. Let’s have a look into the past. The U.S. effectively abandoned the gold standard in 1933 as the Great Depression hit. Faced with mounting unemployment and spiraling deflation, the U.S. government found that it is unable to stimulate the economy. To deter people from cashing in deposits and depleting the gold supply, the U.S. and other governments had to keep interest rates high, but that made it too expensive for people and businesses to borrow. So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold, allowing the government to pump money into the economy and lower interest rates. The United States followed the gold standard until August 15, 1971, when President Richard Nixon announced that the government would no longer convert dollars to gold at a fixed value. Thus the gold standard was completely abandoned. Some events require radical solutions and the U.S. was not probably a better chance to solve it differently. Currency needs to be stable and it is hard to predict whether the volatility of Bitcoin will be similarly stable as current currencies. We are rather skeptical for a variety of reasons. It is difficult to predict the future but one thing is certain. Cryptocurrencies will bring changes in society and it is already visible. Attempts to create CBDC is just a first step in searching for solutions to the current situation. Anyway, if you believe in the collapse of fiat currencies then you need to realize that the economies of many countries will be collapsing as well and all cryptocurrencies can be extremely volatile for a long time. Bitcoin, together with all other cryptocurrencies, is not able to solve the global economic collapse that would come within let’s say within 5 years. It is great to see that people and even big investors perceive Bitcoin as a hedge in bad times. On the other hand, there will come good times when it is smart to sell gold or bitcoins and invest money at the beginning of a new cycle. If you have a look in the past you will find that gold is volatile and respects economic cycles. It is very probable that Bitcoin will behave similarly in the future.
Commercial banks are not threatened by the existence of gold so we can conclude that they are not threatened by Bitcoin as well. It is not going to change until the majority of people will start using alternatives to fiat currencies. Such an alternative must be stable. The business of commercial banks is about the currency that is used by the majority. A commercial bank can offer you many services like opening a standard or business account, opening a savings account, taking different types of loans (short-term, long-term, or business loans), you can insure yourself or your property. Cryptocurrency must be able to disrupt these services to compete with banks. The stability of currencies is simply the most important attribute of the current fiat currencies from the point of people. Other important attributes are the settlement time and transaction fees. People are used to paying by payment cards. It is fast and cheap. Moreover, paying by card provides higher privacy than Bitcoin. Merchants are not able to see how much payees have on their accounts. Currently, some people use payment cards that allow them to pay by crypto. In reality, however, fiat currencies are used. Card providers just offer a kind of custody service for users’ cryptocurrencies. Users basically pay by fiat currencies and the provider charges them later via slow crypto transactions. This, again, does not threaten banks. It is probable that they will offer similar crypto payment cards to people if it goes mainstream. So it is rather a new business opportunity for them. The advantage would be that it would be nice protection against printing money. On the other hand, decentralization would suffer a lot regarding the censorship-resistance ability and as we said, the major problem is the volatility. Cryptocurrencies will never succeed in competing with commercial banks if the same or better abilities like current currencies are not delivered. It would be nice to have money that does not suffer from inflation but it is a secondary requirement for the majority of people. Usage in the real-life will always be in the first place.
How can commercial banks be substituted realistically?
The reality is that commercial banks can only be threatened by the decisions of people. People must decide to close their accounts and do not use bank services. The change is not actually about banks but about people. It is necessary to have alternatives that would be able to substitute fiat currencies and bank services. Moreover, there must be significant and visible advantages that persuade people to use it. The only possible way is to create stable coins, scalable decentralized networks, global service for identity management, and allow people to make a contract.
Bitcoin can be understood as a global central bank since the strongest feature is the fixed and unchangeable monetary policy. The Bitcoin transaction network is not able to compete with traditional payment solutions and even if it was the case then it would be a competitor only to these payment networks but not to banks. Luckily, the ability to create a monetary system with predefined features and attributes is not a privilege of Bitcoin. Cardano can have it as well as other projects. It does not matter whether we have 21M bitcoins or 45B ADA coins. Technologically, they are just numbers and we do not even know whether it is smart to have forever capped the maximum coins that will be emitted. It would be another topic for another article. What really matters, is the building of alternatives that will be attractive to users. Only higher adoption can cause a major change in society. Cryptocurrencies in the hands of minorities or big investors are nice but with low transformative power.
To compete with traditional banks, we need to surround the digital monetary policy systems with the abilities of payment systems and commercial banks. In other words, we need to surround Bitcoin and/or Cardano with abilities like fast and cheap transaction systems, the stability of the means of exchange, systems for identity management, loaning, insurance, ‘reading’ the real world (Oracles), etc. We need innovations in all these areas. The Conservative approach to innovations, as we can see in the case of Bitcoin development, is premature. As we said, it is a great and unique monetary system but unfortunately nothing else. Without a decentralized infrastructure, it can be easily surrounded by traditional banks and it is what we actually see. The real economy needs transactions and bank services. Cardano is better positioned to provide these abilities than Bitcoin. The team behind Cardano is big, experienced, and strong. They will innovate and build the infrastructure until the ultimate goal is delivered. It is exactly what we needed. We are not at the point that we could say that we have done it. The opposite is true. We will always need to innovate and maintain a high level of decentralization.
To put it simply, only the combination of stable coins and smart contracts can actually compete with traditional commercial banks. We will need more services like Oracles to interconnect the digital and physical worlds and a system for identity management. The most important thing is actually a stable currency. We can already observe that USDT (Tether) is a very successful project. We need something like that but without the need to collateralize it by physical US dollars. We rather need something like an algorithmic digital currency that is collateralized by other digital assets. As we have already mentioned, Facebook works on the Libra project. Libra should be collateralized by a basket of global currencies and maybe other assets like stocks or bonds. Thus, stability could be achieved even during money printing. It would be really nice to create a digital stable currency that would be collateralized only by digital assets like BTC or ADA. Maybe other tokenized assets could be used. There are basically two questions regarding stable coins. Which assets to use as collateral and what to use to stabilize the currency. Cryptocurrencies are fully digitalized assets so they are great candidates for collateralization. They are volatile and priced by fiat currencies. Thus, they cannot be used directly 1:1. It is necessary to involve some stabilization mechanism. Should it be a basket of stable global currencies as in the case of Libra? Should it rather be some value deduced from the ability to buy the same amount of goods over time? Or, can it be a combination of more inputs? These are tough questions and we will probably see many attempts in the future.
Once we have a stable digital currency the rest will be much easier. It will be relatively easy to create modern bank services via Cardano smart contracts. Bank services are basically about conditions between a bank and people that are written and signed in a paper contract. Replacing the paper contract with a digital smart contract is a relatively easy task. Loaning and insurance industries can be easily disrupted. Cardano will be connected with Atala Prism which is a system developed by IOG for working with digital identity. People can have a global decentralized digital identity. Oracles try to resolve connections between the real-world and the digital world. Information about the world is nowadays mostly in databases anyway so the connection between Cardano and databases, or replacing traditional databases with private/public blockchain solutions, is a simple task.
The digitalization of the world is a continuous process. Some people are skeptical of the idea that it is possible to connect these two worlds. In our view, we need to continue with innovations if we want to use digital currencies. The only reason why gold is not able to provide the same service as it could in the past is the fact that the world is more globalized and digitized. Gold is still scarce and you can buy it to hedge against economic turbulences. Gold has not changed and it is the same for thousands of years. What has actually changed are the needs of humans and the ability to create digital scarcity. The advantage of cryptocurrencies is the fact that it is more suitable for usage in the digital world. That is the only reason why gold can possibly be less relevant in the future. Digital scarcity can be easily replicated. Why is the digital scarcity of Bitcoin more relevant than the scarcity of Cardano? It is just about adoption and the adoption is about real usage within the digital world. If Cardano is able to substitute commercial banks then the ADA scarcity will be naturally relevant. Can we digitize a paper agreement between a bank and a people? If yes then we will improve the abilities of the digital world and at the same time, make paper agreements obsolete. In other words, we will improve digitalization.
The fastest way to disrupt banks would be to connect the effort of all teams in the crypto space. The goal is the same for all projects. We want to decentralize the monetary system, bank services, and also other digital services. It is a pity that we can see toxicity and rivalry between crypto projects. The joined effort would make more sense. Bitcoin as a monetary system, with other PoS networks like Cardano providing necessary functionalities and services that would increase usability, would be a big win. Anyway, Cardano can provide abilities for substitution of both central and commercial banks. It does not mean that traditional banks will disappear. People will have to choose what they want and we all know that their opinion is shaped by governments and social media. The existence of a better alternative does not mean that the alternative is adopted by the majority. Banks already know that the change is coming and CBDC can be perceived as the reaction of central banks to cryptocurrencies. It means that cryptocurrencies have already succeeded and their influence will just rise. Many crypto projects are already too big to fail. Now, it is not about one single winner that will take all. There will definitely be more winners and we can just guess which functionalities and services will be required by people. In our view, Cardano has the best prerequisites to allow us to be bankless.
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