By Laura K. Inamedinova
August 21st, 2018

Can traditional banks collaborate with the world of crypto?

The quick rise of Bitcoin, occurred last summer, definitely become a signal of danger to traditional financial institutions and the industry of banking.

Initially, the leaders of the most prominent players, including JPMorgan and Goldman Sachs, highly criticized the prospects of digital currencies, thus weakening the positions of crypto community. The central banks of many countries also expressed numerous sceptic opinions regarding the future of cryptocurrencies, and in some countries crypto activities were completely banned. However, the primary reaction was followed by certain liberal policies, such as crypto trading in traditional banks or official positions of central banks, encouraging the collaboration of both traditionalists and innovators. The sequence of events is thrilling and raising more questions than providing answers. The potential cooperation of traditional banks and crypto geeks as well as the adaptation of cryptocurrencies in the most important financial governing bodies are definitely beautiful ideas. What is necessary for their realization?

Generally speaking, a while ago, it could be a bit difficult to imagine the mutual cooperation of mainstream banking institutions and representatives from the world of crypto. First and foremost, it was not a surprise that the already mentioned large criticism from both private and public financial institutions might have a large role to continue the tension between both sides.

(c) Pixabay

Also, the legal framework of crypto activities has not been developed enough and the loopholes in regulation discouraged reputable companies from closer affiliation with the new type of currencies. On the side of mainstream crypto communities, they positioned themselves as the genuine rivals of traditional banking and finance system, trying to become an alternative rather than a cooperator. In this case it is important to separate the primary idea of typical crypto-minded entrepreneurs and the attempts of modernization from traditional banks, since the latter began to create their own cryptocurrencies to overcome the Bitcoin-based environment after a quick rise of Bitcoin in summer 2017.

In addition, it would not be a mistaking idea to suggest that a certain paradox occurred. Overall, the increasing popularity of crypto assets managed to strongly affect the banking industry while considering both private companies and state institutions. Generally speaking, the technologic potential of blockchain could encourage sceptic-minded entities to make a shift towards more liberal attitude towards ongoing disruption. Given the fact that cryptocurrencies were (and still are) the most developed and applicable product of blockchain, the break of ice between crypto community and the traditional banking system could be seen as an expected outcome. Even though Bitcoin experienced a drastic fluctuation in the end of last year and the reaction of banking and finance industry was similarly harsh in comparison to the attitudes expressed by officials only a few months earlier when the value cryptocurrencies was steadily growing, the adaptation of cryptocurrencies and the liberalization of related policies did not completely stop.

The current situation regarding the collaboration of banks and crypto should not be evaluated unanimously. On one hand, a number of major improvements in this relationship have occurred over more than a year. The largest investment banks worldwide have started to adapt their own cryptocurrencies. One of the major players, Goldman Sachs started to widely support fintech companies focusing on cryptocurrencies, as, for example, Circle which released a crypto version of the US Dollar. JPMorgan, famous of the previously sceptic view of the CEO, also joined the crypto bandwagon: the appointment of Oliver Harris, the new head of crypto-assets strategy from the millennial generation can clearly indicate the liberal shift and the increase of crypto-related activities.

Meanwhile, the reactions of central banks are different as far as crypto activities are concerned. In some cases, the position of a single central bank is not fully clear. In the beginning of this year, the European Central Bank (ECB) claimed that cryptocurrencies are ‘so far not exactly very high on our to-do list’, but agreed on the need of regulations within the European Union.

It’s not exactly very high on our to-do list

However, a few months later this institution pointed on the necessity to separate crypto dealings from other financial activities. What is more, the lack of exact tone is noticeable in the communication of a whole central bank system worldwide. Generally, they do not agree on a united position regarding cryptocurrencies and their potential effects to the financial ecosystem. This disagreement is followed by such consequences as investors of China which banned all crypto activities are still able to trade cryptocurrencies on the exchanges based in other countries. All in all, the attempts to regulate cryptocurrencies are rather bland than cooperative and clear at the moment.

Looking back to the last year, one could claim that the advance regarding the collaboration of crypto enthusiasts and banking institutions has been already made. Starting with entirely negative attitudes, more and more private banking institutions have started to adapt cryptocurrencies and blockchain. However, this affiliation should be regarded in a reserved manner as long-run results do not exist yet. Regarding the cooperation of crypto and central banks, the most important task at the moment is to find a common ground of regulations. It should be helpful while setting the further prospects of both institutional attitude and crypto development.