When cryptocurrencies were first introduced, it was a method for people to bypass the necessity for banks to overlook the transactions. That idea has grown exponentially in the past few years. Today, over $100 billion is reportedly invested in digital currencies. One of the obvious stakeholders that have been taking note of what is happening within the space is banks. In recent news, Goldman SachsChief Executive Officer has recently stated that the firm is examining the potential of cryptocurrency. This is a huge progress because if banks allow the trading of cryptocurrency, this will further legitimize the space and create more harmony within the ecosystem.
This move was probably made due to the demand from more conservative investors that want to invest in cryptocurrencies but want to find receive channel to do so. This is the reason why global they are looking into facilitating the trade of cryptocurrencies. No doubt, the consumer base of most banks are asking for them to allow the trading of cryptocurrencies through their channel. The interest that banks are receiving is making them reconsider their stance on cryptocurrencies.
If this plan does go through, banks will then act as a broker-dealer in this market. However, a huge issue arises from this move. Banks are in a dilemma because they are legally required to adhere to rules that prevent money-laundering. As cryptocurrencies were not issued by banks, they have difficulty ensuring that the transactions done within their system does not support any illegal activities.
This has been a matter of discussion. JP Morgan CEO has repeatedly stated that Bitcoin is mainly used to fund criminal activities. The leaders of many other major banks have also stated that the cryptocurrencies itself are not secure. Therefore, banks dabbling in that space can mean huge trouble for the bank itself.
Cryptocurrencies as a currency of choice for criminals
Some of the best qualities of the cryptocurrency in which it is decentralized has made it a favorite among criminals. In fact, it is commonly used in drug deals and ransom demands. As it is not controlled by the government, it’s difficult for anyone to seek justice in the case of wrongdoing. Therefore, the increasing growth of Bitcoin is causing more governments to consider how they are regulating the space.
With banks, it is essential that they know who they are transacting with and the credibility of the cryptocurrency. However, critics believe that banks simply want to crush cryptocurrency. The reason for this is because some cryptocurrencies such as Ripple is considered as a direct competitor to banks. Therefore, the presence of cryptocurrencies such as Ripple poses more of a threat compared to Bitcoin that operates more like a currency.
Despite this, banks should consider the usage of Ripple in their infrastructure because it offers a viable blockchain that can be a source of competitive advantage for banks. Therefore, banks may not be seeking out to crush cryptocurrencies for now. Although so, there is evidence that they are investing in blockchain-based solutions and they may be waiting, and the cryptocurrencies become reliable. The industry also needs to be more established for banks to consider allowing Bitcoin trading on their platform.
Admittedly, the decision to allow Bitcoin trading will cause a lot of scrutiny within the space especially from regulators. On top of that, there is the question of an impending classification of cryptocurrencies that may be released at any point in time. Currently, exchanges are already struggling with the fact that the cryptocurrencies that allow trading within their infrastructure may be classified as a security. If this does happen, the exchange can get into trouble. The same also applies to banks.
China closed their doors to cryptocurrency
Despite the dilemma of being in deciding whether or not to allow Bitcoin trading, China has been very clear about their opinion on the space. This is evident when the banks banned cryptocurrency trading and the government forced all cryptocurrency exchanges to shut down. There is also the risk of high volatility which is related to cryptocurrencies. If a bank has given a huge amount of leverage to trade and the client only trades in cryptocurrencies, it could spell trouble the market crashes.
However, a potential solution to this issue volatility lies in derivative contracts. As the Chicago Board Options Exchange has released a Bitcoin future, it could be possible that banks can use Bitcoin in derivatives and international trade finance. The impending decision from the bank is being watched closely by investors.