Are banks still relevant in a cryptocurrency world?

Are banks still relevant in a cryptocurrency world?

The global financial crisis of 2008 dramatically shook public confidence in the banking industry, with confidence taking many years to be restored, but only after the introduction of sweeping regulatory measures. As for the present, can banks cease to exist at some point in the face of cryptocurrency? Would peer-to-peer lending replace traditional bank loans like cryptocurrencies replace bank payments, or is this a fancy thought on the part of those promoting the use of cryptocurrencies, who have recently suffered heavy losses? volatile or an adjustment of market prices according to their point of view?

Bankers have a weird way of reinventing themselves and making themselves indispensable, or at least some of their core businesses. Challengers in the banking system, such as fintech companies, have come to rely on banks to conserve their cash reserves and clear their payments.

Despite the increase in branch bank closures, banks saw an opportunity to remain relevant with electronic payments and online and mobile payment applications. Credit cards can carry the brands of airlines, hotels, or national retailers, but they are always issued by banks. But can a decentralized marketplace in which everyone interacts directly with each other replace banks? This is where cryptocurrencies have now entered space. As more people embrace bitcoin, the vision behind cryptocurrencies fades, fiat or ‘real’ currencies would fall into disuse, creating cryptocurrency banks but also attracting the attention of regulatory authorities.

In Saudi Arabia, the central bank, or SAMA, has made its position clear on the matter. Speaking at the fifth edition of the Riyadh Future Investment Initiative 2021, SAMA Governor Fahad Al-Mubarak stressed that traditional banking systems will remain important and will not face the ” destruction “by digital currencies. Rather, it would be an expansion of centralized systems for regulating tenders. The governor has made no effort, stating bluntly that SAMA should not be involved in cryptocurrency assets, stating that those who deal with them are “criminals” but that regulators should catch up on this. which concerns the governance of crypto-currencies in the Gulf. He suggested that there might be a need for a low-cost digital central bank that simulates digital operations and that has a hedge against the actual liquidity held by central banks.

Others have suggested that the rise in cryptocurrencies is mainly due to two reasons: for their use in criminal operations, as noted by Al-Mubarak, but also because of an erosion of trust between the public and governments. For those who prefer to invest in Sharia-compliant financial services, an important market segment in the Gulf, cryptocurrency products have yet to be confirmed as compliant with Islamic law, and some Islamic countries have adopted or are considering d ” adopt fatwas prohibiting their use.

In conclusion, for banks to remain relevant in the face of advances in cryptocurrency, they must now take bolder steps towards their own digitalization. In this regard, SAMA announced that it has approved the establishment of several new digital banks in Saudi Arabia. However, banks exist because their depositors want to be able to withdraw their funds at any time without waiting for the customers who borrowed them to return them and without incurring losses in the event of default by the borrowers.

Cryptocurrency experiments have also highlighted that, despite all of its problems, the traditional banking system is still probably the most efficient means of intermediation between savers and lenders. Until a better system is invented, some central banks, like SAMA, will be on their guard to protect the traditional banking system.

• Dr Mohamed Ramady is a former Principal Banker and Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.

Disclaimer: The opinions expressed by the authors of this section are their own and do not necessarily reflect the views of Arab News


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