Why blockchain-based banking is better banking

Cryptocurrency-based financial service providers are rebuilding banking from the bottom up. Unsurprisingly, they’ve made a few improvements.

It’s safe to say the traditional banking sector doesn’t get a lot of love from its customers. Consumers and business customers alike often view dealings with banks as a necessary evil. There are good reasons for this. Common complaints about traditional banks include hidden or abusive fees, appalling customer service, poor administration and an apparently wilful disdain for clients’ needs. 

Banking customers express their frustrations about every stage of the customer lifecycle, from the moment they open an account to the time they try to leave. But in fairness to mainstream banks, it can be hard to deliver a first-rate service when your systems and processes date from the last century. Many high street financial service players have arrived where they are today through a process of mergers and acquisitions in which new additions to the corporate structure are bolted on as ably as possible given time and resource constraints. 

This process of accretion applies not only to brands and teams, but also to underlying technologies. The IT systems that traditional banks rely on are as often as not a patchwork of multiple platforms that do not always work smoothly together. In some other industries, it is possible companies would have ripped out and replaced these messy infrastructures a long time ago. But because banks are burdened with immense financial responsibility and heavy doses of regulation, the prevailing attitude is to leave well alone. 

Nevertheless, what is clear is that if you were to design a bank today it would probably look and behave very differently to these traditional players. And the proof lies with companies that are designing banking services today powered by cryptocurrencies. BVNK launched in October 2021 with the aim of making digital asset-based financial services more accessible so that non-experts could enjoy the benefits. It’s a useful example of what you can achieve when you start with a blank slate and design processes and systems with tomorrow’s financial environment in mind. 

The first step in this design process is to recognise the growing demand for a bridge between fiat and digital currencies. Customers increasingly want the option to operate in bitcoin or Ethereum as easily as they do in dollars or euros. Truly modern banking services should cater for the digital and fiat worlds seamlessly. And starting with cryptocurrencies as a given leads to improved banking system design. 

Free from the shackles of legacy technology, cryptocurrency-based banking can embark on innovation based on a rethink of how blockchain and digital assets can transform core services. This allows for the creation of processes and systems that are quicker, more efficient, better performing and more cost effective than those seen in traditional banking. 

Take cross-border payments, for example. Traditionally, this is an area that is highly complex, dominated by local and regional regulations, constraints and requirements. Merchants that want to operate internationally are forced to use a variety of payment service providers across different markets. There is also a need to set up bank accounts to handle local currencies, which contributes to high costs, settlement delays and a general lack of transparency. With digital assets, you can sidestep all this and enjoy simple, cheap and almost instant cross-border payments. 

The value of digital assets is particularly evident in cross-border transactions because of the heavy commissions charged by international payment providers. But all payments are easier, cheaper and quicker with cryptocurrencies. 

Another benefit of working with digital assets is that you can access higher yield products - that is, products with interest rates higher than what is  available in traditional money markets. These products are based on servicing the capital requirements of the cryptocurrency industry and so are not directly exposed to the volatility of cryptocurrencies themselves. Assets do not leave secure custody and are insured while held in certain yield products. 

Turning to real estate investment, cryptocurrency banking could create borderless, transparent and scalable access to investments through platforms that use digital tokens to offer stakes in commercial and residential property.

Over time, one of the biggest impacts of cryptocurrency-based decentralised finance could relate to credit services. The smart contracts underpinning cryptocurrency banking have the potential to extend credit to customer segments with unconventional credit histories, an attribute that is true of sizable numbers of small and medium-sized businesses. Cryptocurrencies could reduce the cost of credit for these SMBs, easing the burden on up to almost 213 million firms around the world. These are just a few of the many ways in which blockchain-based banking is out-performing traditional banks. 

There is plenty more to come as the industry continues to unlock the innovation potential that comes with blockchain, but the case for cryptocurrency-based banking is already strong. Watch this space.