Cryptocurrencies have emerged as a transformational force in the financial industry. This disruption is being driven by a few major factors, namely, the decentralization from central governments, the proliferation of financial services to everyone everywhere (democratizing finance), and new parallel economies.
The Disruptive Impact of Cryptocurrencies on Traditional Banking Systems
For the traditional banking system, I think one of the most important ways in which cryptocurrencies have been disruptive is that we no longer depend on a single unitary financial System. Time-consuming: Payments, lending and cross-border transfers are all traditional services that operate through intermediaries — banks (Peprah et al, 2018). Blockchain technology, as used in cryptocurrencies, enables peer-to-peer transactions no need for an intermediary so fees are lower and transaction times are shorter. Bitcoin is capable of international remittances at a tiny fraction of the cost than services offered by traditional banks (the sender simply sends bitcoin, an intermediary converts it to local currency if needed, no involvement with the antiquated banking systems necessary).
What is more, cryptocurrencies enable financial services to be democratic. Cryptocurrencies can empower and provide financial services to individuals or small companies who are often excluded from the traditional banking sector, by allowing anyone with an internet connection a role in that same ecosystem (Krishna & Panda, 2023). Collaboration with the Ethereum project has allowed companies to develop Decentralised Finance (DeFi) systems which present use cases for lending, borrowing and more without reliance on traditional intermediaries (Schar, 2021). By allowing users to generate interest on their cryptocurrency and freely convert tokens, DeFi services like Aave or Uniswap are building a more transparent financial system (Darlin et al, 2022).
Another example of how cryptocurrency has impacted South Africa is its integration with Luno and Zapper. This will allow Luno to bring its 31,000 merchants based in South Africa the ability to accept payments via cryptocurrency using Zapper on their app named “Luno Pay”. This collaboration also enables the average user to use their crypto for a broad range of transactions, including purchases and payment methods as well as fuel, which has played an advancement in moving closer towards mainstream participation. The move even highlights that crypto is becoming the actual payment method replacing standard forms of banking in this region (Okorie, 2024).
Challenges and Limitations of Cryptocurrencies in Financial Transactions
However, the volatility of cryptocurrencies limits their use as reliable instruments to exchange value. The price of cryptocurrencies can be volatile and this volatility might prevent companies from accepting them since even a small daily change in the value of payment is significant over time. Add to this that several governments have started legislating cryptocurrencies and believe it or not — for pretty much the same reasons like fighting fraud, money laundering and consumer protection issues. Likewise, these regulations might water down the promise of cryptocurrencies on a larger scale, so they will never be able to serve as full substitute for every standard financial transaction (Feinstein et al, 2021; Katsiampa, 2018).
Conclusion
In summary, cryptocurrencies could revolutionize the finance sector but significant roadblocks like volatility and regulation remain. That said, a balanced approach of technology and tradition may be necessary to fully realize the transformative potential that cryptocurrencies represent for changing money.
References
- Darlin, M., Palaiokrassas, G., & Tassiulas, L., 2022. Debt-Financed Collateral and Stability Risks in the DeFi Ecosystem. 2022 4th Conference on Blockchain Research & Applications for Innovative Networks and Services (BRAINS), pp. 5-12. https://doi.org/10.1109/BRAINS55737.2022.9909090.
- Feinstein, B., & Werbach, K., 2021. The Impact of Cryptocurrency Regulation on Trading Markets. LSN: Law & Finance: Empirical (Topic). https://doi.org/10.2139/ssrn.3649475.
- Katsiampa, P. (2018). An Empirical Investigation of Volatility Dynamics in the Cryptocurrency Market. Capital Markets: Asset Pricing & Valuation eJournal. https://doi.org/10.2139/ssrn.3202317.
- Krishna, S., & Panda, A., 2023. Cryptocurrency Adoption and Its Influence on Traditional Financial Markets. INTERANTIONAL JOURNAL OF SCIENTIFIC RESEARCH IN ENGINEERING AND MANAGEMENT. https://doi.org/10.55041/ijsrem27054.
- Okorie, I. J. (2024, October 7). Over 31,000 merchants in South Africa now accept crypto on Luno. Techpoint Africa. https://techpoint.africa/2024/10/07/luno-merchants-accept-crypto-south-africa/
- Peprah, W., Afriyie, A., Abandoh-Sam, J., & Afriyie, E., 2018. Dollarization 2.0 a Cryptocurrency: Impact on Traditional Banks and Fiat Currency. International Journal of Academic Research in Business and Social Sciences. https://doi.org/10.6007/IJARBSS/V8-I6/4213.
