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Why centralized banking doesn't make sense for decentralized currencies

Why centralized banking doesn't make sense for decentralized currencies

Last updated 31st Jan 2023

Following the wild spikes and crashes of cryptocurrency prices over the last year or so, there’s still a lot of questions and interest in crypto options from both veterans and newcomers alike. One of the largest recent developments, though, is a growing interest from centralized banks to try and make headway into digital currency. 

Some governments have already rolled out their versions of CBDCs (central bank digital currencies) — in essence, national cryptocurrency. Rather than being decentralized, these serve as digital formats for fiat money, with the centralized banks being both regulator and account holder. Presented as a way to have “the best of both worlds,” in reality, applying centralized banking to traditionally decentralized currency can cause more issues than it solves. Let’s take a closer look. 

Where centralized banking falls short 

The major issue with applying centralized banking to cryptocurrency in its current form is that, in many ways, crypto became popular because it aims to circumvent issues with banks. While a valuable part of modern society, many centralized banks still have serious issues with:

 ●  Added compliance costs;

●  Inefficiencies at every level;

●  Outdated regulations ; and

●  Banks using consumer data and funds to their benefit .

For example, to process and move payments, existing centralized banks need to move through a massive set of intermediaries, basically designed to instill trust. This comes at a heavy price both in time and, in some cases, added fees. The last thing crypto adherents want to see is the return of some of the issues they were trying to avoid in the first place.

In addition, by letting centralized banking into the world of digital currency, we also open up a potential sea of political concerns. Currently, central banks are deeply tied to commercial banks , which is part of the reason that we saw a rush to “bail out” the banks during 2008’s financial crisis. This was an attempt to stave off global financial chaos. Some fear that the advent of CBDCs could reestablish those ties, but now with cryptocurrency as well.

Finally, existing currencies , such as Bitcoin, would instantly risk their value tanking in the face of a national alternative. The last thing early cryptocurrency adopters would want is to be punished for this initiative.

Working around these issues

Ultimately, when it comes to cryptocurrency, introducing centralized banks into the equation causes issues for both national governments and cryptocurrency users. There’s a reason why there’s been a pushback of the idea from both sides. But, if the world isn’t ready to implement CBDCs, what other options are on the table?

Remember, some of the main reasons that people are drawn to decentralized currency in the first place are:

●  Being insulated against bank failures and collapses;

●  Making it easier to transfer money internationally without being subject to fees;

●  Immunity to inflation or deflation; and

●  A minimal barrier to entry.

Any potential solution would need to incorporate these on some level.

One concept that’s growing in popularity is the “ hybrid cryptocurrency ” concept. Some of these provide the stability of centralized currency while maintaining decentralized benefits by allowing trusted community members with a stake in the currency to serve as checks and balances via “voting nodes.” This ensures that major changes to the cryptocurrency only occur with a majority of the vote. 

In addition, there are wallets and other tools available on platforms like Telegram to make digital personal finance and cryptocurrency management more efficient. By staying decentralized and non-custodial, these retain some of the benefits that we’ve been talking about. 

Ultimately, even as values ebb and flow, cryptocurrency is still shifting the way we perceive finance. It’s important that currency creators and users alike are willing to challenge conventions about banking to create a better ecosystem for everyone. 

News Desk

News Desk

The latest news, comment and analysis from our crypto news desk.