Cryptocurrencies: Mediums of exchange or leaders in the financial industry?

Bitcoin futures exchange-traded funds (ETFs), were something eagerly awaited by the cryptocurrency community as well as by large part of the investors and traders. Indeed, for many investors and traders, the approval of ETF cryptocurrencies by regulators gives much easier access to this market, as it satisfies their desire to invest and trade in cryptocurrency-related products. It also allows banks to engage in the cryptocurrency market, as banks have long been under intense pressure from both their trading offices and a wider range of customers, who are pushing bank management to gain access to this market.

However, doubts about cryptocurrencies remain strong, especially in the AML and Compliance Departments, as they do not show the same enthusiasm as bank customers and banks' trading rooms. But on the other hand, there is a growing sense that something needs to be done, a way must be found so that banks do not lag in the developments that bring and continue to bring cryptocurrencies with the technology that accompanies them, and/or the innovation that brings which is widely applied to decentralized financing.

Two crucial issues

A big question for banks is, to what extent should they actively engage with cryptocurrencies, as they find it difficult to understand whether “what” drives investors and traders in these products today will continue in the future. If the cryptocurrencies become market leaders or if they eventually integrate into the current monetary regime or in an even more unfavourable scenario the whole cryptocurrency market will explode like a bubble.

The answers to these questions may not be so difficult. Perhaps all that is needed is for banks, but also for all those who are wondering about cryptocurrencies, to look for and explain “what” really leads to cryptocurrencies.

The "what" is probably hidden in two very important issues: the issue " technological development" and the issue "innovation that leads to a new reality".

If cryptocurrencies are driven by the development of technology that provides solutions for guaranteed decentralized transactions between counterparties, using cryptocurrencies, then most likely this process of decentralized transactions will reach a point where in the future it cannot offer much more.

Indeed, technological development, no matter how effective it is when it focuses on a particular process, at some point reaches a level that will hardly be able to offer significant improvements. The result of this weakness will be, what serves, that is in this case the decentralized transactions through cryptocurrencies, to seek a new direction. However, due to the weakness of further significant technological developments for this process, they will not be able to find the direction in which they could offer much more. Thus, this inability will highlight the inherent weaknesses of cryptocurrencies such as the inability to conduct monetary policy using cryptocurrencies. As a result, cryptocurrencies will eventually be driven as means with a relatively low acceptance, or integrated into an existing process, i.e., the existing banking system, or in an unfavourable scenario will explode like a bubble and disappear with a bang.

But if cryptocurrencies are driven by innovation, then the situation will be very different. Innovation is not the technological development of a process such as decentralization of transactions. Innovation is about the process that leads, not to the evolution of a technological process, but to the introduction of concepts that will bring about a complete change that will lead to a new reality where no one can predict its consequences.

Are cryptocurrencies only mediums of exchange?

To be innovative a product, must serve at least the following three concepts:

• To serve great ideas for effective solutions.

• To serve great timeless values.

• To serve the general good.

Proponents of cryptocurrencies argue that cryptocurrencies are innovative because they serve great ideas that offer effective solutions, support great values that are maintained over time, and ultimately work for the common good of all entities. They argue, among other things, that they serve the democratization of trade, equality, and parity.

They provide easy access to all people on earth in inexpensive transactions, thus giving everyone the opportunity to be part of a process where everyone can share equal opportunities and play by common rules, thus providing effective solutions for trade and commerce worldwide. Although cryptocurrencies are considered environmentally not friendly, they claim that they can provide effective ideas and solutions for environmental sustainability.

Consequently, they claim that by creating great ideas that serve effective solutions, based on great values and the common good, cryptocurrencies are considered as innovative products that lead to complete change, as they create a new reality with unpredictable consequences.

On the other hand, critics of cryptocurrencies argue that, among other things, cryptocurrencies undermine the legality of transactions, harm the environment and in the end, all they provide is the execution of transactions between counterparties.

In fact, given that they are decentralized, these transactions are not guaranteed by an institutional authority and therefore cryptocurrencies cannot be accepted as instruments of monetary policy, so in the end they are not able to represent any real monetary value.

They therefore claim that their serious weaknesses and their one-dimensional utility, i.e., the dimension of decentralized transactions, will sooner or later lead cryptocurrencies to a dead end. Thus inevitably, they create a bubble that will burst at some point in the future.

Indeed, if cryptocurrencies focus only on the technological development of decentralized trading systems, then, due to their serious weaknesses, sooner or later the Cassandras of their critics will most likely be confirmed.

But if cryptocurrencies succeed and convince that they are financial instruments that represent great ideas, serve great values and care for the common good, that is, if they succeed and show that they are truly innovative instruments that lead to a new reality, with consequences which are difficult to be predicted, then it is very likely that the ETFs of cryptocurrencies that have just begun to be traded on the stock exchanges will be just the beginning of the creation of a new reality that will include many more similar financial instruments related to cryptocurrencies and decentralized financing. A new reality with unpredictable consequences for the whole industry.

The importance of impartial judgment

Banks and the entire financial sector should judge impartially which of the above applies.

Assessing whether cryptocurrencies are innovative products or just a medium of exchange is extremely important, as based on this valuation they will have to judge not only the future of the existence and prospects of cryptocurrencies, but also the future, prospects, and even the role, of the current financial and banking system. If cryptocurrencies ultimately prove to be innovative financial instruments, regardless of their weaknesses, they will shake the dominance of banks as the exclusive guarantors of the money trading system.

At the end of the day, what will eventually be needed is for the traditional financial system not only to be able to assess whether cryptocurrencies are innovative, but also to convince everyone that the existing banking and financial system can and will remain innovative. That is, the banking and financial system can and does create ideas that provide practical solutions, that it supports great values and that it can and does serve the general good. If the existing banking and financial system cannot convince of the above, then it should not only wonder about the existence and duration of cryptocurrencies, but also about its own role and its own existence in a future that has already come and offers many innovations.

However, what seems to be happening is that the traditional banking and financial system is losing its ability to innovate. For example: Due to monetary policy and uncertainties, in a long period of providing negative real interest rates to depositors and due to excessive household deposits, in developed economies, banks offer low interest rate loans to depositors with a guarantee of their deposited capital which depositors need to commit for the duration of the loan. So, in simple words, that is, depositors lend themselves with their own funds by paying interest to the bank for their own deposits. Can this type of loan be considered as an example of innovation? This is rather an example that leads to a good reason for depositors to leave the existing banking and financial system and look for new financial products outside the traditional financial sector.

The value of being a leader

No one can claim that there are no serious reasons for the existence of negative real interest rates. Obviously negative real interest rates could have under certain circumstances a positive impact on shaping the economic policy of a country or an industry. No one can also accuse the banks of trying to reduce their risks to a minimum by providing the safest possible loans. But if such kind of reasons, put the banking and traditional financial sector in a place that become much less innovative so that, it cannot find ideas that provide practical solutions based on values that seek the common good, then we are probably talking about a new reality.

On the other hand, if new financial products such as cryptocurrencies and decentralized financing succeed and convince most entities that they are the masters of the game in innovation, the masters of creating a new reality, then the question will not be to what extent they will remain in the financial sector but to what extent the traditional financial sector will worth being the industry leader.

A leader is one who can be innovative, the one who can and does generate ideas, gives solutions, and above all, based on values take care of the common good.

The leader is not necessarily the one that has the market share of an industry or a market. Most likely, the traditional banking system will never lose its huge market share. But if it loses the power to innovate then it will cease to be a leading force and thus run the risk of being trapped in a vicious circle of introversion, constantly searching for a new identity in a future that will always be defined by others.

The leader regardless of its market share is the one who dominates in the sector that belongs to, because it has the ability to innovate, paving the way for everyone else to follow. This much is certain, those who deserve to be leaders will have a brilliant course because they have already secured their place in the future that has already come.