Financial Wars: cryptocurrencies vs. the banks
13:39, 19 November 2018
The old era of brick and mortar, centralisation and economic control – could it really be over? A new challenger to the old world of central banks has appeared – cryptocurrencies.
Now traders can explore exciting new markets, and trade ethereum, bitcoin and other crypto wonders, all from the comfort of their homes.
Is crypto the future?
With decentralised networks, smart contracts and digital currencies, this new contender is storming the world by force. Legislation is increasing worldwide and crypto is being adapted by major financial organisations, such as Goldman Sachs who have plans in the works (despite the ‘fake’ news rumours) to create a crypto desk. The question is will it ever be enough to over take the current economic systems?
In this article we’ll explore the key differences between central banks and cryptocurrencies, and highlight the central issues in the battle between them.
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The challengers
First up is the central banks. Almost all countries in the world have their own central bank. They are generally responsible for the regulation of country’s banks, who follow the central bank’s monetary policy and provides financial services. Generally central banks are privately owned, but may be controlled by the country’s government. In the past this is only place people stored their funds.
Turning to cryptocurrencies. They are new and exciting, ruled by decentralised systems that allow traders to make worldwide transactions without middleman. Blockchains and smart contracts make all that possible. Many people are directly investing in cryptocurrencies by buying bitcoin, litecoin, ripple, etc outright. Others prefer to exploit the volatile nature of the market through the intradaytrading of ethereumand other cryptos.
Old vs new – the pluses and minuses
Let’s take a look at some of the pluses and minuses presented by both systems.
Central banks
Pluses:
– Have been around a long time
– Trusted
– Manage the majority of the world’s financial transactions
Minuses:
– Centralised control and top-down decision making
– Decisions affect the country’s economy
– Bureaucracy and longer transaction times
Cryptocurrencies
Pluses:
– Decentralised
– Accessible and transparent
– Developing the world’s current financial system
Minuses:
– Exchange hacks
– Lack of legislation
– Expensive coin costs (you can find the latest prices on the Ethereum chart, Bitcoin chart, Ripple chart, etc.)
Comparing the two
How do the central banks and cryptocurrencies measure up when compared on speed, reliability, risks, staying power and finances?
| Central banks | Cryptocurrencies |
|---|---|---|
Speed – Measured in transactions per second (tps) | Representing the side of central banks, international payment leader Visa boasts between 24,000-56,000 tps. Confirmed transaction (from sender’s account to merchant’s) time from 24 hours to 3 days. | Various cryptocurrencies offer different speeds. The most popular are: Bitcoin – 3-7tps, confirmed transaction 60 mins. Ethereum – 15-25tps, confirmed transaction 6 mins. Ripple – 1,500-50,000 tps, confirmed transaction 4 seconds. |
Reliability – How reliable are they really? | A tale as old as time, the central banks are old-world institutions and stables in our lives. Everyday, billions if not trillions of transactions are successfully carried out through central banks and related institutions. | As they are decentralised, cryptocurrency networks are supposedly more reliable as no single source can destroy them. Issues arise however with so-called network ‘backdoors’ that can be used to corrupt them. Overall, the networks themselves have a certain level of reliability. |
Risks – Which systems presents the least risks? | They may have proven their worth and reliability. But, that’s not to say there haven’t been scandals, such as the 2008 global financial crash. In spite of that, they have survived, prefering to take a more objective role in the world’s financial arena. | Known to be volatile, prone to sharp fluctuations cryptocurrencies don’t have the same stability as fiat-currencies. Although this may prove to be an advantage to those looking to trade Ethereum, Bitcoin and others through CFDs. Hacker scandals, such as Mt. Gox, reveal they are not entirely secure either. On the plus side, increased legislation worldwide may prove in their favour. |
Staying power – Playing the long game, which system will win? | The central banks may have an unfair advantage in this one. The concept dates back to Ancient Egypt in 2750-2150 BC. However the world’s oldest modern central bank is the Bank of Amsterdam founded in 1609. This was followed by Sweden’s central bank the Sveriges Riksbank in 1668 and the Bank of England in 1694.
| Cryptocurrencies hit the world only a decade ago with the release of Bitcoin’s White Paper in 2008. Despite only a decade of history, cryptocurrencies have changed the financial world as we know it. The cryptocurrencies around now may not remain, but there is a growing consensus that blockchain technology is here to stay. |
Finances – Market capital and money managed, who is on top? | Taking the big four central banks – the US Federal Reserve (the Fed), the European Central Bank (ECB), the Bank of Japan (BOJ) and the Bank of England (BOE). Between them they control the interest rates of $41 trillion dollars in GDP and $5 trillion Forex transactions. And that’s only the big four... | Taking the market cap of the top three crypto networks. We have Bitcoin measuring in at $116,236,810,616 ($116 billion), Ethereum at $24,569,638,097 ($24 billion) and Ripple at $22,877,507,025 ($22 billion). An obviously smaller sum than managed by the central banks. |
Game changer?
Each system presents their pluses and minus. Although the central banks are more established, cryptocurrencies could disrupt the system which has been used for centuries, if not millennia.
But, what if it wasn’t a war between the two, but simply an evolution. As the world become increasingly globalised, development is inevitable.
Take the People’s Bank of China (PBOC) for example. The PBOC is currently working on creating their own cryptocurrency, a new centralised, officially recognised system, marrying the world of crypto and central banks.
Could this be first step into the next era for finance? Will other banks follow suit?
Let’s be realistic!
Will cryptocurrencies be able to overtake central banks? The answer is not quite so simple, the real question we should be exploring is, howwill the current economic superpowers – central banks, large financial institutions, and companies – adopt this new technology?
It’s undoubtable that the world is changing, legislation has increased worldwide (see: Belarus, Malta, South Korea, to name a few) allowing this progression. So, although cryptocurrencies present new opportunities (and a proposed financial revolution) the final offer on the table might be the development of central banks, not the establishment of new ones.
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