Last year was a true coming-out party for cryptocurrencies, with the aggregate market cap of all virtual currencies soaring by more than 3,300% -- almost $600 billion on a nominal basis. At the heart of this surge in value for digital currencies is blockchain technology.
How blockchain technology could be a game changer
For those of you unfamiliar, blockchain is the digital, distributed, and decentralized ledger underpinning most cryptocurrencies that's responsible for recording all transactions without the need for a financial intermediary, which is almost always a bank. Its rise to fame is a result of perceived inefficiencies with the current banking system, such as long processing times and exorbitant transactions fees that developers aimed to fix. Today, blockchain offers three primary solutions to the limitations of the current banking system.
First, blockchain is decentralized, meaning transaction data isn't stored in a central server, but is instead spread across servers and hard drives across the globe. Creating a decentralized network ensures that no single entity, including businesses or hackers, can gain control over a cryptocurrency or blockchain network, thus making it more secure than traditional banking networks.
Secondly, blockchain removes banks from the equation. With transactions involving just a sender and receiver of funds, there are fewer mouths to feed when it comes to transaction fees. In other words, lower transactions fees could be a boon for consumers and/or businesses.
Finally, but most importantly, blockchain transactions are being validated 24 hours a day, seven days a week. This suggests that blockchain networks could settle transactions, even cross-border ones, in real time, or perhaps in a matter of seconds. By comparison, today's banking system could hold cross-border payments for up to five business days while being validated.
It's for these reasons that blockchain is believed to be a game changer for the banking industry. Though few financial institutions have examined its potential beyond just proof-of-concept tests and small-scale projects, that could soon change.
Is a cryptocurrency banking service coming to a country near you?
According to a report earlier this week by CoinTelegraph Deutsch, blockchain-based payment service provider Bitwala announced that it aims to become the first to launch a cryptocurrency-based banking service. Bitwala has already submitted an application with the German Federal Financial Supervisory Authority to approve the project, and has suggested that approval would mean German deposit insurance would protect customer funds of up to 100,000 euro ($122,420), like any traditional banking service.
As with any fiat currency, Bitwala would offer customers access to their very own account, complete with international bank account numbers, SWIFT codes (an international bank code that identifies banks worldwide), and a Mastercard-branded debit card. Interestingly enough, Bitwala had planned to use a Visa (NYSE:V)-branded debit card, but had to change its plans after Visa ended its relationship with debit card provider WaveCrest, which issues debit cards for Bitwala, CryptoPay, TenX, and Wirex. Visa blamed WaveCrest's noncompliance with its operating rules as the reason for the relationship termination via a tweet.
With those issues now in the rearview mirror, Bitwala aims to offer the following perks to its cryptocurrency banking customers, aside from those described above:
- Real-time notifications for every payment or transaction made from a user's debit card;
- Contactless debit cards that allow consumers to tap point-of-sale devices and pay, improving transaction security;
- A Bitwala Bitcoin wallet that provides a secure means to store and trade bitcoin, as well as stay in control of your private keys; and
- The ability to withdraw from millions of global ATMs instantly.
Though this service would originate in Germany, Bitwala is targeting its crypto-first banking service at a global audience.
Not everyone is on board
However, not all global banks are currently on board with the idea of using branded credit and/or debit cards as a means to purchase cryptocurrencies, which could limit the appeal of the service being offered by Bitwala.
For example, three U.S. banking giants -- Bank of America, JPMorgan Chase, and Citigroup -- announced last month that they'd be disallowing their members from using bank-issued credit cards to purchase cryptocurrencies. These are three of seven money-center banks to have made such a decision.
Their reasoning? First, these banks worry that their members won't be able to repay what they borrowed given the wild volatility of virtual currencies. A survey from LendEDU found that 22.1% of users who purchased bitcoin with a credit card failed to pay off their credit card balances. This concern is exacerbated by the fact that the Federal Reserve is currently in a monetary tightening phase designed to push interest rates, and thus borrowing rates, even higher. Lastly, banks worry about hackers getting ahold of bank-issued credit cards. Since digital currencies are very difficult to track, recovering stolen funds could prove impossible.
To boot, there are likely going to be scalability concerns of launching a cryptocurrency-based debit card. Bitcoin's blockchain, as an example, has been bogged down in recent years by a growing number of users and an inability to gain the needed consensus to dramatically upgrade its network. What's to say that Bitwala's blockchain-based network doesn't hit similar snags if users pile into the unique service?
Though this cryptocurrency-first project is worth keeping a close eye on, it'll still likely take the adoption of cryptocurrencies and blockchain by brand-name businesses before this investor and multinational companies are sold on its potential.