Among the many value propositions that crypto enthusiasts propagate, a cross-border crypto payment network that trumps traditional finance (TradFi) systems may actually be conceivable.
However, the traditional banks are not ones to sit back and let a newcomer eat their market share.
Take US-based banking giant CitiGroup, for example. On 18 September 2023, Citigroup announced that its unit will create and pilot a service called Citi Token Services that will integrate tokenized assets and smart contract technology into its global network. As a result, Citi’s institutional clients will get a 24/7 cross-border payment system.
Will Tradfi Blockchain Solutions Make Cryptocurrencies Redundant?
The news resembles a familiar playbook where the crypto industry develops innovative blockchain solutions, only to be replicated by centralized authorities to make cryptocurrencies less relevant. We are seeing this play out with central bank digital currencies (CBDC). And now, commercial banks want to lead blockchain innovation in a way that serves them best.
So the question we are left pondering is whether the tech behind cryptocurrencies will be absorbed into traditional finance in such a way that Bitcoin and other cryptocurrencies no longer offer any advantage over the Citis and Visas of the world.
Cryptocurrencies and Cross-Border Payments Make Sense
First, let’s talk about why I think cross-border payments and foreign remittances may be the best fit for cryptocurrencies. I have to warn you that there is a personal bias here. I have first-hand experience as to why I think cryptocurrencies — Bitcoin (BTC) and stablecoins in particular — may be a better foreign remittance solution to traditional finance systems.
About two years ago, When I was working for a Europe-based company, my salary was sent every month from Europe to my India-based bank account. The funds were sent over a global payment network called SWIFT, and it took roughly four to five days for the funds to be credited to my account.
Each time, I was charged roughly $20 for intermediary banking, service fees, and taxes. Add the fact that my bank always credited my funds at a lower exchange rate compared to real-time market prices. To make matters worse, if my funds happened to arrive on a Friday afternoon, I would only see it credited on Monday.
To put a figure to my experience, I lost roughly $50 every month on my inward foreign remittances, which would add up to about $600 annually. Now compare that to the average Bitcoin gas fees, which stood at $2.67 at the time of writing. The average time between blocks was roughly 10 minutes.
If my former employer had sent me stablecoins over Ethereum, it would have cost me an average transaction fee of $2.76 (based on gas fees at the time of writing), and it would take about 12 seconds for the transaction to be executed.
These are real-life problems that many have encountered with the traditional finance system. There are too many moving pieces in the old system, including multiple banks, payment networks, geographies, differing regulations, and settling processes. Meanwhile, networks like Bitcoin are open, universal, automatic, and operate 24/7. Was I wrong to think that cryptocurrencies will solve foreign remittance issues?
Traditional Finance’s Pragmatic Approach
Despite its cross-border promise, crypto’s wild price volatility, harsh regulatory conditions, and high taxation make its potential users hesitant.
This situation has created an opening for traditional finance to catch up to its blockchain advancements. Traditional finance is (we hope) weeding out the unwanted qualities of crypto while adopting its best properties.
In November 2022, Citigroup introduced the whitepaper of a global settlement infrastructure concept called Regulated Liability Network (RLN). RLN is envisioned as a global, multi-asset payment and settlement network that uses blockchain technology and smart contracts. The RLN is designed to modernize the financial system by making fiat currencies programmable, adopting a shared blockchain ledger, operating 24/7, and providing instant settlement in multiple sovereign currencies.
Despite the innovative design, the RLN is proposed in a way that the traditional finance system is not disrupted. One where the central bank maintains its supremacy.
RLN’s whitepaper showed that the traditional finance industry does not want to be outdone by cryptocurrencies running on “superior technology.”
“It is unclear whether the sum of existing efforts to upgrade the sovereign currency system can meet the challenge of unregulated digital money. Enhancements to the existing messaging paradigm may be insufficient. CBDC projects may set up competition within the sovereign currency system and not act as substitutes for the external threat. The creation of proprietary bank coins may lead to a fragmented market structure that does not meet the needs of multi-banked users such as corporations,” reads the RLN whitepaper.
Getting back to our question of whether we will see cryptocurrencies made redundant by blockchain solutions coming out of traditional finance. I think that public cryptocurrency networks like Bitcoin and Ethereum are inherently designed in such a way that they will always have an advantage over traditional finance players in particular use cases and vice versa.
We will not see cryptos being driven into extinction, but at the same time, it is difficult to imagine a world where cryptos replace central bank-issued currencies.
For the common person, cryptocurrencies are a boon. What cryptocurrencies give us is options – an alternative to the fiat system. It is an alternative that we can pick and choose when it suits us.
We saw it play out when Russians flocked to bitcoin and stablecoins as the rouble plunged at the start of the Russia-Ukraine war. The same happened in Turkey as hyperinflation ravaged its economy.
Maybe banks fear crypto because they fear losing their “middlemen” status in a world of peer-to-peer money. However, if they can find a way to insert themselves into the story in a useful, safe, and regulated way, maybe they’re not the enemy either.