Cryptocurrencies such as Bitcoin and the underlying blockchain technology that powers these virtual money networks has evolved since they were introduced in 2008, branching out to a number of use cases and capabilities in healthcare, real estate and even voting. Digital currency has the potential to produce tangible innovations in the financial sector now and into the future.

Crypto Technology: A Brief Breakdown

Cryptocurrencies are virtual, anonymous, highly secure forms of currency that run on blockchain technology. This system allows users to bypass a central entity (a bank, for example) to verify and transfer value with a series of cryptographic hashes that identify, reference and validate the block that came before it. This creates a chain of data blocks, or a blockchain. Because each step of the transaction is recorded instantaneously, permanently and transparently, there’s no need for third parties, making transfers significantly cheaper. Transfers are conducted via virtual wallets that allow users to make purchases and conduct other transactions worldwide with anyone who accepts cryptocurrencies as payment or for trade.

Bitcoin is the first and most popular of cryptocurrencies. While it shows volatility in the short term, Bitcoin’s value has increased steadily since inception in 2009. There were more than 1,600 additional cryptocurrencies, also known as “alt coins,” as of March 2019, including:

  • Litecoin, one of the first alternatives to Bitcoin;
  • Ethereum, the basis for smart contracts;
  • ZCash, which focuses on enhanced privacy and security;
  • Ripple, which offers real-time banking transaction settlements across the globe; and
  • Monero, which provides untraceable transactions.
  • New cryptocurrencies — each with specific uses and features — are continually emerging.

Drawbacks

One of the main hurdles to widespread adoption of cryptocurrencies in banking is the significant volatility that crypto markets often experience. This is due, in large part, to the lack of a central authority to regulate value. Cryptocurrencies in their present form are unsuitable for banking functions, which rely on relatively stable currency values.

Despite this volatility, cryptocurrencies and blockchain technology have a role to play in modern and future banking.

Inflation-Fighting Uses

Cryptocurrencies carry less risk of inflation because they are created in limited numbers that cannot be increased. For countries such as Venezuela, which experienced extreme inflation and devaluation of its currency in 2018, Bitcoin or other cryptocurrencies could provide stability and greater monetary value.

Blockchain Innovations

Blockchain technology is poised to have a significant impact on the banking sector, with many financial institutions already implementing smart contracts and blockchain-based lending functions. Further adoption of blockchain technology could mean faster banking transactions, increased transparency, and decreased costs.

Oversight Needs

Banks and other financial institutions will have to develop concrete policies and practices when it comes to cryptocurrencies and work to shape regulations that balance fiduciary standards with the privacy and autonomy of cryptocurrencies.

While it’s unlikely that cryptocurrencies will replace fiat currency in the near future, crypto technology can serve a growing number of banking functions. Want to learn more? Let TIOmarkets keep you updated on the latest developments in cryptocurrency technology.

Lauren Treadwell
Author

Lauren Treadwell is a fintech writer and enthusiast specializing in cryptocurrencies, blockchain technology, innovative investment strategies and financial service startups.

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