The Cryptocurrency Transaction Bitcoin, since its introduction in 2008, is the forerunner in a number of virtual currencies that are recently taking people by storm. The value of bitcoin has skyrocketed from merely $0.08 in 2008 to a whopping $68,000 as of last year- making it one of the most valuable digital assets in the world right now.
Controversy regarding Cryptocurrencies
However, along with Bitcoin’s success comes a whole load of controversy. The crypto coin, like many others before is extremely volatile in nature. Like stocks, cryptocurrency derives its volatility from continuous changes in supply and demand. With government-issued fiat money, this usually isn’t a problem. The government or central bank continuously prints currency to keep up with the economy of a country. Hence whenever inflation or deflation happens, it happens gradually over a period of time. However, this is not the case when it comes to crypto currency.
Why do banks not trust Cryptocurrency Transaction?
The central bank of the country is in charge of putting regulations in place to monitor and control government-issued fiat money. Commercial banks, under the jurisdiction of the central bank, help to keep track of money smaller levels. Banks have also put a number of Customer Due Diligence measures into place. This involves investing in Anti-Money Laundering departments, training law officials to spot suspicious transactions, and employing KYC (Know Your Customer) guidelines. It is mandatory for customers to comply with these rules if they want to open an account in the bank or do any business through out.
On the other hand, the exchange of virtual currencies like Bitcoin and Ethereum does not require users to identify themselves. This makes them the perfect medium for criminals to launder money. The transfer of cryptocurrencies, unlike normal bank transfers, does not require authentication and checks in order to complete. This makes the transfer process much faster, providing money launderers with an easy way to move their funds from one place to another.
Cryptocurrency and anonymity
Cryptocurrencies do not require users to identify themselves in order to give them the privacy that the government doesn’t. Though the allowances regarding identification were done to encourage more people to invest, instead they enabled more financial crimes. Many marketplaces on the dark web accept Bitcoin as a form of payment so that customers do not have to reveal their identify while making purchases. Every Bitcoin transaction is indeed trackable; however, it is only stored using the IP address of the user. In this way, anyone can make transactions on behalf of the owners. This can scramble the trail of investigation and make discerning the owner’s true identity quite difficult.
The fact that cryptocurrencies were created to provide its users with an increased level of privacy for transactions may have also not rubbed banks the right way. The Central Bank is used to being in control of any money passing through the economy. So, if people start making transactions using cryptocurrency, it begins to lose control of its own money. Usually, investors trade in cryptocurrency using centralized platforms like Binance and CoinBase. However, there are also a number of decentralized exchanges that offer complete anonymity to their users. These platforms facilitates the use of anonymity-enhanced coins like Monero and ZCash. These coins offer a much higher level of privacy than Bitcoin and other mainstream crypto coins.
How cryptocurrencies can facilitate fraud
Cryptocurrencies also have a high potential for facilitating fraud. As cryptocurrencies are not bound by any regulations or governing bodies, anyone can create a cryptocurrency and ask people to invest in it. Due to the popularity of Bitcoin, many people are enthusiastically looking to enter the cryptocurrency domain. So, finding people to invest in a new cryptocurrency isn’t all that difficult. One of the most common cryptocurrency scams is the ICO (Initial Coin Offering) scam. In an ICO scam, the creators of fraudulent coins raise money and then disappear without seeing the project to completion. Due to the lack of regulation, usually, no follow-up investigations are done and the hopeful cryptocurrency owners are left high and dry.
The problems cryptocurrencies can cause to banks
The Central Banking authority holds commercial banks to high standards of KYC and AML compliance rules. Not following them may put banks at the risk of incurring high penalties. Having a business that deals with Bitcoin transactions as a client may be extremely difficult for banks in this regard. Due to the lack of transparency on the client’s end, banks may have to spend more in order to get whatever information they need- which often adds up to more than their profits. Due to this, many Central banks have banned all banks from dealing with clients operating with cryptocurrencies entirely. Even in countries where this may be legal, some banks do not take on such clients because of the high risk involved.
Many banks also deal with overseas clients. In this case, they may have to conform to the rules of that country’s Central Bank as well while initiating foreign transactions. If the other country has limits on cryptocurrency transactions, then the bank will not be able to go through with the transaction. Hence, many banks are avoiding dealing with cryptocurrency entirely.
To combat this, many countries are aiming to create their own digital currencies. These currencies will be digital interpretations of the country’s own currency and will exist exclusively virtually. Citizens will be able to link their bank accounts to their digital wallets and make payments simply using their mobile phones in the future. This step will hopefully help bridge the gap between banks and cryptocurrency.
Conclusion
It seems that cryptocurrency transactions are limited to being crypto-assets for now. Many countries refuse to accept even the most popular coins like Bitcoin and Ethereum as legal tender. Due to this, people cannot use cryptocurrency to make any transactions. The limited supply of cryptocurrencies also makes them extremely volatile assets. Unlike fiat money, which is stable, cryptocurrencies may experience extreme changes in value in short periods of time. This has made banks very apprehensive in dealing with them. The other big reason why banks refuse to take on any transactions in cryptocurrencies is because of the lack of regulations involved.
Anyone can buy and sell cryptocurrency without proving their identity. Banks need clients to comply with certain KYC/AML guidelines in order to do business with them. Attempting to keep track of every transaction made in cryptocurrency can end up costing banks a lot of time and money. The financial crime happens in cryptocurrencies. This is mainly due to the anonymity they provide. It can also land the bank in trouble and cause it to incur penalties from the Central Bank. Cryptocurrency still needs to take many strides until it can become a reliable currency that banks will accept.
