The founder of the Mythos Capital cryptocurrency fund, Ryan Sean Adams, believes that “banks today are like newspapers in the early ’90s,” meaning that the development of the Internet has led to the fact that large amounts of information received by people started migrating to the computer screen, and later—to the smartphone. But the print press still exists, trying to survive, including through better printing, the inclusion of goods samplers, as well as other tricks that support interest in it. Almost 30 years have passed since the appearance of the Internet in society, but the print media survived. But will banks survive in the collision with new technologies, such as the blockchain and, actually, cryptocurrencies?
“Bank Run” Because of a Cryptocurrency Apocalypse, Which Will Not Happen Today
The basis of financing of any bank is the attraction of depositors’ funds, with an average of 80% of such resources being individuals’ money, only 15% of legal entities and another 5% are funds of the central bank. Credit institutions are susceptible to such a phenomenon as the “bank run,” that is, when depositors begin to massively withdraw money from their accounts. Usually, even a 5-percent reduction in the total deposit base can put the organization on the verge of stopping their activities for several days. In this case, the situation is usually saved by the central bank of the country, which provides additional liquidity.
The “bank run” can start both for objective reasons (depositors’ uncertainty that banks are able to fulfill their obligations tomorrow due to unreliable economic policies, disruptions in the cash dispensing at ATMs, and others), as well as subjectively, for example, competition between banks or politics. Thus, during the ongoing political crisis in France, which has caused a surge in interest in cryptocurrency, reports have begun to appear that the country might face a “bank run” organized by the demonstrators. At the same time, people who did not have a direct relationship to the internal political situation in France, such as “tweet poet” Max Keiser, took part in spreading rumors about this. It is enough to recall his tweet in early December 2018. But, as one of the inhabitants of Paris noted, “I’m in France, and, unfortunately, there is absolutely no actual bank run. ATMs are working fine, and I did not notice any people trying to get their money back from the bank. That moment will come one day, but probably only in a decade.”
The Romance of Banks with Cryptocurrencies: It Started and Ended with Fiat
Banks are currently not standing still and are beginning to work closely with new financial technologies. The beginning of 2019 brought news that the London-based Euro Exim Bank was starting to use one of the three Ripple technology platforms, xRapid. Moreover, it is used not just in an experimental mode—this is already being done by dozens of credit institutions around the world. It is essential that the classic bank, in fact, began the process of dismantling the popularity of the SWIFT banking communications system, replacing it with some kind of similar option (for example, in Russia, banks that came under U.S. sanctions have switched to the domestic analog of SWIFT), which includes the use of XRP tokens (an optional technical condition when working with any Ripple platform). But this is only a small step, as transactions will eventually lead to payments in fiat.
Similarly insignificant for the modification of the essence of the banking system is its gradual manifestation of openness to working with cryptocurrency businesses. For example, in the documents filed for the IPO, California-based Silvergate Bank reported on raising $1.7 billion from 483 cryptocurrency companies, including such well-known ones as Coinbase, Gemini, Kraken, and bitFlyer. Thus, the deposit base was formed by the cryptocurrency business, but it is fundamentally important that the money was still fiat. As a result, we see that large players in the cryptocurrency market are applying for banking services and placing funds not in any cryptocurrency bank that works only with cryptocurrencies, both in passive and active operations, but in an organization that does business in fiat.
The Crypto Community Is Unwilling to Use Bitcoin?
Even this interaction is far from guaranteed. In Switzerland, which is considered one of the countries most favorably disposed to cryptocurrencies, a small number of banks open accounts for such organizations. In Cyprus and India, there is a ban on working with cryptocurrency organizations, and crypto enthusiasts are working to change the situation.
Meanwhile, there is no consensus in the crypto market about what to do with the first cryptocurrency. Analyst Jimmy Song argued that it is better to use not Bitcoin, but fiat from credit cards for payment purposes. The logic here is that it is better to save cryptocurrencies and not to waste them, although, on the other hand, how can then users deal with the fact that according to the logic of Bitcoin creator Satoshi Nakamoto, its mission is to become a substitute for fiat? Recently, Song’s opinion was criticized by the author of the podcast Colin Talks, and crypto analyst Tone Vays decided that spending Bitcoins makes sense if there is a need and if there is no desire to buy them again later. Obviously, with such an approach, the massive creation of cryptocurrency banks, which form the deposit base and carry out all their operations only in crypto coins, and not in any fiat, is currently unlikely.
Prime Minister of the Russian Federation: “We still need to prepare for something...”
Does this mean that banks may not fear for their position in the future financial system? For example, most Belgian bankers are sure that there is no place for their organizations. The colleagues of the Belgians overseas in the U.S. Federal Reserve express concern that fintech companies are set to redraw the banking sector, and their development can no longer be simply ignored. The fact that cryptocurrencies are serious was confirmed by Russian Prime Minister Dmitry Medvedev: “If we talk about the digital agenda, the digital area is such a matrix, on the basis of which everything is developing now. It needs to be financed as quickly as possible because otherwise, we will not be able to work.” He also said, “We still need to prepare for something else,” making it clear that the development of modern financial technologies can have big consequences.
On January 15, Medvedev warned those who intend to “bury” cryptocurrencies that this should not be done, but one should see “bright and dark sides in this phenomenon, like any economic process.” It is curious that two high-ranking officials of the Russian government, Economic Development Minister Maxim Oreshkin and Deputy Prime Minister Maxim Akimov mentioned important points that arise in connection with this phenomenon despite their very skeptical outlook on cryptocurrencies. Thus, Oreshkin drew attention to the fact that significant investments are flowing into the development of new technologies due to cryptocurrencies, and Akimov said that the financial services developing on the basis of crypto networks have the potential for growth.
U.S. and Russia Are Waiting, Venezuela Is Changing the Banking System
In the United States and Russia, there is an understanding that financial technologies have great potential, but the response to this is more cautious and expectant, or, as is the case with the SEC, even very critical. But despite the presence of the cryptocurrency phenomenon in the lives of these countries, truly breakthrough events are taking place in other states.
Venezuela began to transfer all the bank accounts of its citizens to the Petro state cryptocurrency. But if this step can still be considered given the non-decentralized nature of this crypto coin, then collecting taxes in the form of different cryptocurrencies to the country’s budget without transferring them to fiat by banks is already essential. It becomes interesting for credit organizations to raise funds for deposits in cryptocurrencies. It is clear that this development in the banking sector of Venezuela was the result of hyperinflation, the loss of public confidence in the local currency, when cryptocurrencies, being carriers of value, are perceived as an interesting asset.
Of course, the situation may take a different path. If a demand for cryptocurrencies in the banking system was formed by society in Venezuela, not by the authorities, then in the event of a sharp depreciation of classical assets in central banks, as well as under the influence of financial sanctions, the regulators can begin to replace them with cryptocurrencies, as predicted for 2019 by the cryptographer Nick Szabo. In this case, the example of central banks will lead to the transformation of the banking system as a whole according to the Venezuelan scenario. But as the Winklevoss brothers remarked, there is a need for appropriate regulation to ensure that gold can be replaced by cryptocurrencies, that is, everything depends on the desire of the regulators themselves.
The Errors of the Regulators Will Accelerate the Disappearance of Banks and the Transition to Cryptocurrency
The scenario proposed by Nick Szabo may come true in individual countries, but in general, changes in the banking system that will lead to the disappearance of the need for its services may start due to the erroneous actions of the regulators. A cautious attitude toward cryptocurrency trading leads to an increase in the popularity of crypto coin trading on decentralized platforms. If the rate of growth in need of fintech companies in financing is not covered by the supply of fiat from banks, then businesses will increasingly switch to direct financing in crypto coins. And this will occur not only through ICOs, which have become too problematic in a number of countries but through cryptocurrency lending.
In turn, this will lead to a greater spread of salaries in crypto coins, that is, the emergence of a complete cryptocurrency ecosystem, where cryptocurrencies will act as the focus of all necessary banking services. In such a situation, the need for banks will begin to fall sharply, and this will become the fundamental “bank run” when it is impossible to save credit organizations, as regulators simply do not have enough resources. Yes, fiat can be printed and fill the banks with liquidity, but in this case, the transformation of the banking system will go according to the Venezuelan scenario. Thus, if regulators contribute in every way to the development of cryptocurrencies, which is doubtful, then banks will be able to survive for quite a long time. But the more attempts to limit the spread of crypto coins, the faster we’ll witness a time when banking services will no longer be necessary for society.