Banks are a core part of nearly every country’s economy but now they are under threat from cryptocurrency.Cryptocurrency is completely innovating how normal people use their money which can have dramatic consequences.The consequences can range from consumer behaviour all the way to the financial systems of the country.What would a world look like in which banks are replaced by cryptocurrencies?
The main core principle behind bankin g has remained the same throughout the centuries which revolves around a single core idea which is to create money.This principle is known as “Fractional reserve banking” in the finance world.
This idea of reserve banking started when banks started storing gold for their investors but realized it was unlikely they would all take out the gold at the same time.Hence they started to give out loans to other people with the wealth of other people.This made the bank a lot of money due to the process called interest.
This also greatly benefitted the economy since it allowed for smaller businesses to grow into large scale ones.As banking got more modernized we started giving out banknotes instead of solid gold.
Nowadays however all this is recorded in a digital space.The core principle is still the same which revolves around loaning out other people’s money to generate interest for the bank.What makes this surprising is that 90% of all transaction in the world right now is purely digital.This process of loaning out money is extremely vital to the economy since the banks can respond to the need for new money.Therefore the supply of money in the economy fluctuates a lot depending on the economic climate.The way these commercial banks make money is mostly due to central banks that set the interest rates.
This entire delicate procedure is now currently under threat by a new way of banking called cryptocurrency.Cryptocurrency solves three problems that the central banks have struggled with.
The first one is that since every coin is uniquely generated means that no one can spend the same coin twice.This reduces the risk of counterfeit coins and generating money out of thin air.Another problem it solves is that it is extremely trustworthy even though it is decentralized.What I mean by that is for a transfer to take place in the world of cryptocurrency all the nodes spread around the world have to check it.Lastly, since cryptocurrency is so versatile we would now no longer need a centralized infrastructure for finance.
This is because cryptocurrencies can be exchanged on the internet without the need for a middle man.
There is also a lot of benefits os using but there is also a lot of cons.One of the cons is that cryptocurrency is extremely volatile meaning the price fluctuates a lot throughout the day.This can result in a bread costing 3 bitcoin in the morning but the very next day costing 6.
Another con is that bitcoin is capped at 21 million coins which would allow for zero growth for the economy.
As banks are the ones that create money for the economy we would have no one creating the money anymore which would cripple the economy immensely.
Central bankings are the captain of the ship we called economy.If the captain is replaced by cryptocurrency a whole host of problems would soon come.There won’t be only problems but lots of benefits which would benefit us as a whole.
Link to another article:
https://thinkwriterise.com/norway-the-best-economy-in-the-world/
Link to the picture:
https://www.proventioconsulting.com/crypto-currency-and-block-chain-technology-explained/.
