About banks and virtual currencies

On the one hand, banks, with their bureaucracy, centralization, regulation, security; on the other hand, crypto-coins, with their confidence in the system, distributed ledger, free of economic policies, oscillations. At first glance, antagonist ideas between bank and cryptocurrencies seem to portray an inescapable reality. Would peaceful coexistence between virtual currency services and banks be possible?

Platonic antagonism and crypto-coins in the ideal world

It makes sense to start with the difference between the money we use to buy food, to pay for tickets, which we can keep in the bank account (real, pesos, dollars, euros, etc.), and the cryptocurrencies (Bitcoin, Ethereum, Ripple, Litecoin, etc. .).

A currency has 3 characteristics: it serves as a value reserve, accounting unit and medium of exchange. Cryptocurrencies are a type of virtual asset that, when successful, encompasses these 3 characteristics. However, the element “crypto” – in addition to meaning “hidden, secret”, usually implies the use of encryption for two innovations in relation to what we are accustomed to call money: not having a fiduciary value, that is, not being guaranteed by a State or public authority, and not be freely issued by an authority.

How is this possible? Through blockchain technology, which has already been explained here on the IRIS blog and in this video in our youtube channel.

Cryptocurrency is a product of the Cypherpunk culture, which questions the role of intermediaries, especially governments, in day-to-day transactions. The idea is to replace these people with automated, independent and secure systems based on encryption.

The blockchain system eliminates the need for a reliable central power that checks each transaction and records the transferred values. In its conception, cryptocurrency would be a form of carrying out transactions in large scale without need for banks.

Cryptocurrency middlemen

It turns out that not everything happened as planned by the cypherpunks. People did not stop having intermediaries to manage their transactions – not even the cryptocurrency adepts. Nor was there a single crypto-currency that would be “the” digital currency.

Today there is a great diversity of crypto-coins whose “launch” in the market occurred not by spontaneous use for payment, but by purchase of the users, as if they were shares – the ICO, or Initial Coin Offerings. The presence of companies that carry out issuance, transfer, purchase and sale and administration of crypto-coins portfolios in the market is a fact.

Still, the initial proposal for rule freedom and anonymity allowed for episodes such as Silk Road, a site where illicit substances could be purchased for crypto-currency payment. This case is used to associate freedom and anonymity with the image of illicit practices that are morally reprehensible. As a way to curb illicit financial flows through this technology, the Brazilian Federal Revenue Department issued in 2019, Normative Instruction that obligates companies that provide cryptomoeda services to register and inform the Treasury on transactions monthly.

Between competition and cooperation

The discourse of antagonism between crypto-coins and currencies, against the control of financial systems by governments, also places banks as part of the problem. In response to this negative context, some banks have questioned the very legitimacy of criptocurrency services as their customers. In Brazil, the practice of banks to close accounts of cryptomoedas companies is investigated in an inquiry opened by the Administrative Council of Economic Defense (CADE).

Turning elsewhere, Ripple CEO Brad Garlinghouse argues that, like other new formats that have emerged with the Internet in other areas, virtual currencies do not compete with their purported correspondent in the physical world. Its business model, as opposed to the proposed cypherpunk, is to work with the system, interconnecting the financial infrastructure of cross-border payment.

He also argues that large banks are the ones that control large and international transactions. So the vast majority of small banks that use these services can take advantage of blockchain technology to make global transactions at a lower cost. Because customers would be banks, they would be in line with anti-money laundering guidelines, such as know-your-customer measures and transaction logging.

Cryptocurrency’s bridge-deviation duality

These two perspectives show us that a technology can be used to generate situations of conflict but also to improve reality. The cryptocurrencies’ ideal conflicts with the banking system by trying to deflect it, correcting problems of government control and offering alternatives. However, depending on the use made of them, one can also invest in strengthening this system, transforming them into bridges between different banks, giving them greater efficiency and international coverage.

For more on how cryptocurrencies work, I recommend watching this Cryptocurrency and Blockchain Information Bytes!