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Rupam Shome

Cryptocurrency and Its Challenges in the Banking Infrastructure
Rupam Shome Senior Business Analyst | October 11, 2017

The world is expanding rapidly and there are three things driving this change: the movement of people, money, and information. Although the movement of people cannot be completely regarded as a phenomenon subject to digitalization, the movement of money and information has largely been reproduced in a digital format, enabling seamless transmission of data across multiple channels.

So what is so intriguing about money being transferred from one person to another over the digital universe? No one wants their money to fall into the wrong hands. With a considerable amount of disruptions in the various payment mechanisms available today, there is a need for a seamless transfer of money from one channel to another, in a faster and more secured way.


The major disruption in the digital currency world came with the invention of the cryptocurrency or the cryptographic currency such as bitcoin which uses the peer-to-peer (P2P) network to transfer money from one user to other. Unlike normal digital payments which require a bank account, cryptocurrency payments do not need one. They are wired over to users digitally with transactions lodged securely in a public ledger using a methodology called as blockchain. The market capitalization of the cryptocurrency industry changes dramatically because of the high volatility but is estimated to be just over $3.5 billion.

Despite the overwhelming growth of the industry, there is still a lot of skepticism among major financial institutions towards the adoption of the newfound technology for use in their payment gateways. Let us try and understand the reasons behind this:

No need to hold a bank account – The usage of cryptocurrency payment mechanism does not entail a user to hold a bank account. These currencies are stored digitally in a virtual account and are transferred from one account to another over the network. Large financial institutions, however, tend to have a certain amount of control over their client’s assets through the use of accounts. A shift in the usage of such accounts leads to an understanding of losing control over the assets.

Conversion – The digital currency, unlike the normal currency, is subject to the realm of only the digital world. In order for that currency to be used as a part of normal day-to-day transactions, they are converted to universal currencies through the medium of exchanges. There are transactional costs involved to process these conversions. Financial institutions might not be willing to endure these transactional costs.

The digital currency, unlike the normal currency, is subject to the realm of only the digital world.

Regulations – While the expanding cryptocurrency market has the potential to revolutionize the way money is transferred or exchanged, its introduction to the global venues is fraught with challenges and pitfalls. As a result of virtual currencies not being recognized across the global marketplace, it is critical to develop a standardized approach for their use.

The current state of regulations are still in its infancy and do not necessitate the need for the use of cryptographic measures for the transfer and use of money. This, in turn, creates a lot of inhibitions among the larger financial industries towards the adoption of digital currencies.

Theft/security – The larger understanding of the financial universe is that the digital currencies are a means of laundering money. This arises primarily from the lack of understanding of the procedures involved in cryptocurrencies. Although there have been instances of a breach of security measures in the digital currency world, a broader outlook will be needed to understand the complexity of the digital currency money transfer.

Accountability – Due to the unregulated nature of the digital currencies and a lack of a centralized authority to monitor the exchange, a high degree of skepticism is involved in the accountability of the transactions carried through the cryptocurrency network. Transactions that occur through the use and exchange of these altcoins are independent of formal banking systems and therefore can make tax evasion simpler for individuals. Cryptocurrencies are a mode of exchange that is complex (and in some cases impossible) to track. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies.

There exists a plethora of opportunities in the world of digital currencies. Unless government organizations formalize the entire structure of monetary transactions involving digital currencies, there would be a long wait for financial institutions to get involved in something which has drawn a lot of skepticism due to its nature.