Crypto vs Banking: Comparing Safety and Benefits
Cryptocurrency has been all the rage for several years now. It’s been hailed as a game-changer in the financial sector by tech geeks and condemned as a sign of doom by those distrusting of its power and those worried about its potential misuse.
When we ignore the loud voices of both hype and skepticism, the fact remains that cryptocurrencies have indeed gained popularity as a decentralized alternative to traditional banking institutions. But is it a better and safer choice than banking?
Understanding Cryptocurrency and Banking
Before we get to the meat of the matter, let’s lay down some fundamental definitions:
What is Cryptocurrency?
Cryptocurrency — or crypto for short — is a digital or virtual currency. Crypto is decentralized. That is, it operates autonomously and does not depend on a central bank. In other words, it is not controlled by governments, financial institutions, etc.
Cryptocurrencies are generated through mining. Essentially, users mine crypto by contributing computing power and helping the network operate. In exchange, they get rewarded with crypto tokens.
Tokens are stored in digital wallets, either cold (i.e., hardware) or hot (i.e., software). Wallets, too, are based on blockchain technology. This is important for safety measures, as blockchains record all transactions across a network of computers, making it impossible for the data to be tampered with without malicious parties leaving a trace.
What is Traditional Banking?
Traditional banking is a system we are all familiar with. In short, we rely on financial institutions such as banks to provide us with services such as savings accounts, loans, etc. As mentioned, institutions of this kind are regulated by governments and other official bodies, so they are subject to all sorts of laws that limit or control their activities.
Nonetheless, despite their centralized nature, traditional banking offers a range of benefits that you might not get with a crypto bank, for example, mortgages. But do such positive services outweigh the problems such as bureaucracy?
Crypto vs Banking System: Which Is Better?
The answer to this question is not as straightforward as you might think. It is true that cryptocurrencies offer several advantages over traditional banking systems. However, they are not without their risks, and there are a lot of challenges on their way to becoming a more mainstream financial asset.
As mentioned, cryptocurrencies operate in a decentralized network. That is indeed a plus since there are no central authorities or financial bodies regulating transactions. However, those bodies would also protect investors in case of fraud or hacking. If you think about it, traditional banks are regulated by government bodies, so they promise robust protection and security measures to their clients, for example, deposit insurance and fraud protection.
Still, despite challenges similar to these, cryptocurrencies have gained a lot of traction in the banking industry. That is hardly surprising if we consider some of their advantages. For example, they offer faster and cheaper transactions, and crypto banks give individuals in remote areas a chance to explore banking features that would otherwise be unavailable to them due to geographical limitations.
Comparing the Safety
Traditional banks are generally considered to be more secure. This is hardly surprising since traditional banks are highly regulated and insured by official government entities (think Federal Deposit Insurance Corporation, i.e., FDIC). That means the government will step in to ensure your rights are met and that you never suffer losses due to malicious intent.
Conversely, crypto is not backed by any such body, so users are not insured. That means that if your crypto wallet is hacked or you fall prey to a scam on an illegitimate platform, you likely won’t be able to recover your funds.
That being said, you must remember that the safety of both traditional banks and crypto largely depends on how you approach them. For example, you can protect your investments by using secure wallets, enabling two-factor authentication (2FA), and being cautious about the apps you’re using.
Comparing the Benefits
As briefly mentioned, both crypto and traditional banks have their own advantages:
Benefits of Crypto:
- Decentralization: Cryptocurrencies allow for greater freedom and independence from government or corporate interference;
- Privacy: Crypto transactions can be more private since they do not require personal information disclosure;
- Lower fees: Crypto banks have lower transaction fees than traditional banks. This makes them a great option for international transactions;
- Accessibility: Crypto is available to everyone with an internet connection.
Benefits of Traditional Banks:
- Security: Traditional banks are highly regulated and thus provide greater financial security;
- Products: Traditional banks offer a wider range of financial services, including loans and credit cards, which are not a thing in the crypto sphere;
- History: Traditional banking has been around for thousands of years, so most clients are familiar with its systems;
- In-person support: Traditional banks offer in-person customer support and advisory services, which is terrific for those looking for a more intimate approach to financing.
As you can probably tell, the benefits of crypto and traditional banks are relative. That is, they depend on individual client needs and preferences. In short, while cryptocurrencies offer more independence and lower fees, traditional banks take the crown in terms of security and convenience.
Adoption of Crypto in Relation to Traditional Banking Services
All that being said, crypto adoption has been steadily increasing over the past few years. Nowadays, we see more and more individuals and businesses using crypto to invest, trade, transfer funds, etc. However, the fact remains that the crypto user base is still relatively small.
Traditional banks have much larger client bases and are still the default banking solution for the vast majority of people. The statistics are largely due to the fact that traditional banks have been around for centuries, inspiring trust in the general population.
Another traditional bank advantage is the ability to offer mortgages and insurance. Crypto, on the other hand, is still in its early stages and thus has limited offerings in comparison.
Crypto vs Banking System: What the Future Brings
The future implications of crypto are still uncertain due to rapid changes in the financial industry. However, the same can be said about traditional banks, which have to do something to stay competitive in the market. Thus, it seems like crypto and traditional banks are going to compete head-to-head in areas such as:
- Increased competition: Traditional banks may face increased competition from crypto and crypto-friendly online banks. Such competition is likely to lead to new innovations in the sector;
- Decentralization: Decentralized blockchain technology gives crypto a huge advantage, so we might see a shift away from centralized banking systems even in brick-and-mortar institutions;
- Security: Traditional banks may have to offer more secure money storing and management options if they are to compete with blockchain tech;
- Regulation: Crypto suffers from a lack of regulation, so more rigorous governmental scrutiny is soon going to be needed if crypto banks want to compete with traditional banks. That is especially true if crypto banks want to introduce clients to something like crypto loans.
Do banks hate crypto? Are blockchain-based payments the future? What is the best course of action for those looking for reliable financial services?
Both crypto and traditional banks have their own pros and cons in regard to the safety and benefits they bring to the table. For example, Traditional banks offer a more regulated approach to finance management, but at the cost of higher fees and limited accessibility. Conversely, crypto provides a more decentralized system with higher chances of digital risk.
The crypto vs banking system debate ultimately depends on each client’s preferences and needs, as well as their risk tolerance. Moreover, it is important to note that both crypto and traditional banking systems are constantly evolving and trying to outdo one another. So, with the rise of new technologies, we may see some kind of hybrid, more secure financial system in the future.