Challenge of linking crypto to traditional banking

Published on:

  • Integrating cryptocurrencies with conventional financial systems becomes increasingly essential as they become more commonplace.
  • Despite the difficulties posed by regulation, technical limits, security risks, and a lack of understanding, several possible remedies can aid in linking crypto to traditional banking systems.
  • As decentralised finance expands, the need to bridge the gap between crypto and traditional finance becomes more pressing.

Cryptocurrencies have recently made headlines regarding their potential to revolutionise how people view investment and money. The decentralised nature and lack of government control mean that crypto offers a level of autonomy that fiat currency cannot match.

Consequently, many people have diversified their investment portfolios to take advantage of the high returns and the hedge against crypto’s economic unpredictability. Moreover, crypto’s privacy and anonymity represent a significant draw for individuals who value their financial autonomy and privacy.

However, integrating cryptocurrencies with conventional financial systems becomes increasingly essential as they become more commonplace. This presents several obstacles to overcome before cryptocurrencies can realise their full potential. For instance, traditional institutions may be hesitant to work with cryptocurrencies due to concerns about money laundering and other illicit activities. Moreover, the technical difficulty of integrating cryptocurrencies with existing banking systems can prove intimidating.

Despite these hurdles, potential solutions could help bridge the divide between cryptocurrencies and conventional banking. From regulations to technological advancements, the future appears promising for those interested in leveraging the financial potential of cryptocurrencies. This article examines the primary obstacles to linking crypto to traditional banking systems and the potential solutions.

Read more: Blockchain Breakthrough: African banks embrace the future of finance

Regulatory challenges

Regulatory compliance represents a significant hurdle to linking crypto to traditional banking. Anti-money laundering (AML) and Know Your Customer (KYC) policies offer stringent regulations for conventional banks. Given their decentralised and anonymous nature, cryptocurrencies are considered high-risk assets. This makes it more difficult for institutions to conform to these regulations to prevent fraudulent or unlawful activities.

Technical shortcomings

Another issue is the technical difficulties in linking crypto to traditional banking systems. Conventional financial institutions are based on legacy innovations unsuited to manage cryptocurrencies’ distinctive capabilities, including smart contracts and decentralised ledgers.

Security risks

One of the most significant concerns about cryptocurrencies is security. The 2022 catastrophe and recent bank runs at some prominent crypto-friendly banks particularly highlighted crypto’s security risks. Hackers have a history of targeting cryptocurrencies, and there have been several high-profile events with huge sums of money stolen. Traditional banks may have concerns about the security risks connected with cryptocurrencies. Thus, they may lack the expertise or resources to manage these risks appropriately.

Lack of a proper synergy between crypto and traditional banking

Another impediment to linking crypto to traditional banking is a lack of synergy between the two sectors. Crypto is an evolving technology. As such, many traditional financial institutions may be unfamiliar with how they operate or how to link their existing infrastructure. As a result, banks might have to employ additional measures to ensure compliance with applicable rules and industry best practices.

Overcoming the challenges

Despite the difficulties posed by regulation, technical limits, security risks, and a lack of understanding, several possible remedies can aid in linking crypto to traditional banking systems.

Regulatory structures

Several nations are developing regulatory structures that will clarify the legal status of cryptocurrencies and establish rules for banks and other financial institutions to follow. These frameworks can help relieve worries about AML and KYC procedures by increasing trust and transparency among banks and cryptocurrency consumers.

For example, the US Financial Crimes Enforcement Network (FinCEN) in 2013 defined how virtual currency enterprises should comply with AML and KYC standards. In 2021, the Office of the Comptroller of the Currency (OCC) published instructions allowing banks to utilise stablecoins for payment.

Collaboration guidelines

Some banks are developing industry guidelines for dealing with cryptocurrencies and collaborating with regulators. The World Economic Forum developed a framework in 2018 for regulators and banks. The framework would help in assessing the risks related to cryptocurrency. The framework offers rules for evaluating cryptocurrency risks and ideas for building risk management techniques.

Collaboration and awareness are critical for closing the gap between crypto and traditional banking institutions. Collaboration between traditional finance and cryptocurrency firms can develop deeper knowledge and trust between the two industries, resulting in more successful integration. Conventional bankers can benefit from education programs that help them better grasp crypto currencies’ unique features and benefits, allowing them to make more educated decisions about incorporating them into their existing infrastructure.

Platforms for interoperability or asset management corporations have arisen as a possible solution to the issues of linking crypto to traditional banking infrastructure. Such businesses can operate as go-betweens for banks and cryptocurrency networks, allowing for the frictionless transfer of payments and data. They add a layer of abstraction to the integration process, which can help to reduce its complexity.

Companies must comply with existing AML/KYC requirements to give banks the tools to monitor transactions and prevent unlawful conduct. Obtaining licenses from regulatory organisations in major financial jurisdictions is critical to ensuring that these companies adhere to the necessary legislation and provide banks with further confidence when working with cryptocurrencies. As a result, by complying with regulatory regulations, these organisations can serve as a vital link between traditional banking and cryptocurrencies, allowing the two to coexist seamlessly.

Bridging the gap between crypto and traditional finance

As decentralised finance expands, the need to bridge the gap between crypto and traditional finance becomes more pressing. While linking these two ecosystems will undoubtedly pose challenges, there are also potential solutions. One quick fix would be to hire asset managers with experience in both industries. These managers must be licensed and adhere to solid standards to keep investments safe and secure.

These need to be conversant with the regulatory technical, security, and operational issues that crypto holders face. Their experience would help them navigate the conventional financial sector. By tackling these issues head-on, they will design a more balanced and integrated system that benefits stakeholders in both industries who wish to interact.

As digital assets gain popularity, building the infrastructure required to facilitate their integration with conventional financial systems is critical. Through their regulated licenses and expertise in blockchain technology, authorised and competent asset managers can play a crucial role in closing the gap between these two sectors by exploiting the benefits of crypto while preserving the trust and stability that traditional banking structures offer.

Read more: Africa: Redefining financial inclusion through decentralized finance (DeFi)

Related

Leave a Reply

Please enter your comment!
Please enter your name here

You have not selected any currencies to display