Cryptocurrencies started back in 2008 with the advent of Bitcoin. Ten years on, Wikipedia now lists the number of different cryptocurrencies on the market today at 1,384. That is the equivalent of a new crypto being introduced every 2.6 days!
While it is clear that these cryptos are not just a fad, what is less clear is what threats or benefits they will bring to the banking industry. But to begin to understand this, we must first start by understanding the different types of currency.
When we hear the word “currency,” most of us tend to think of cold, hard cash. It may come as a surprise then, to know that this type of currency, or fiat currency, accounts for barely 8% of the world’s total money supply. That means 92% of the world’s wealth exists in different forms. They are:
Virtual currency. This is a type of currency that do not exist in physical reality, but can be earned, bought, sold or traded in a given community that accepts the value. Think of your airline miles. You can’t touch or hold them, yet they exist. They are also utterly worthless EXCEPT to you and your airline, where they are treated with the value that has been set by them and agreed upon by you.
Digital currency. This has become the most common form of currency. Again, it is not tangible, but it is very real. Your direct deposit, Paypal, credit cards, etc. All these transactions happen, money changes hands, but there is no physical money, simply numbers moving around through computers. These can even be issued by central banks, as is the case in several countries like Sweden, where cash is disappearing.
Cryptocurrency. A type of digital currency AND virtual currency according to Wikipedia, crypto is a hybrid that circumvents a lot of third-party interference and provides a conduit for straight-through, person-to-person dealings. Using the power of blockchain technology, it provides transparency for all transactions and is not backed by a central entity, such as a central bank, but rather relies on accepted universal validation from its users.
All that said, it is safe to say that for banks, there are far more questions than answers at this point. There is potential for great disruption, but only time will tell.
Want to read more? Let’s look at more differences between digital and cryptocurrencies HERE.