What do Traditional Banks Think Of Ethereum?

The idea of money, or paying for debts, transactions, or investments with a mandated currency, was probably first conceptualized over 7,000 years ago, although no one knows for sure. And our modern financial infrastructure, bolstered by central banks, governments, and currency minting facilities, is powered and dependent on the utilization of paper and coin fiat currencies.

As controlled by governments and central banking authorities, we earn and use money has not changed in generations. And besides the advent of bureaucracy in modern times, the social mechanics of currency has not changed in thousands of years.

However, the introduction of blockchain technology and certain types of cryptocurrencies have irrevocably changed how currency is used. Governments, central banks, regulatory authorities, and traditional banks are worried about the potential for blockchain technology and cryptocurrencies to outmode traditional bank practices and paper and coin currencies.

Although Bitcoin was first introduced in 2009, followed by cryptocurrencies like Ethereum, many governments and traditional banks initially imposed strict regulations and restrictions to protect traditional bank practices.

The United States Federal Reserve has recently announced that it is not worried about cryptocurrencies overtaking the dollar, only about the instability in financial markets and traditional transaction practices that could be caused by competing digital currencies.

The fear of traditional currencies being replaced by digital currencies, and everyday people creating their digital currencies online instead of relying on traditional banking practices, is what traditional banks were worried about.

Traditional Banks and Ethereum

So, what does the banking industry think of cryptocurrencies, especially Ethereum, now?

Traditional banks are seemingly more accepting of Ethereum amongst other cryptocurrencies because of its advanced DeFi blockchain technology and transaction security measures.

Central banks and traditional banks are slowly accepting that paperless; digital currency practices will become the norm sooner or later.

Traditional banks have also accepted that instead of fighting the onslaught of cryptocurrency popularity, they can proactively use the advantages of blockchain technology for their ends.

For the time being, traditional banks are hesitatingly accepting of Ethereum, and its accompanying blockchain technology benefits, so long as they do not obsolete traditional currencies or banking practices. Traditional banks are trying to find a way to have the best of both worlds regarding blockchain technology, Ethereum, and traditional banking practices.

A 2020 survey by the Bank of International Settlements showed that over 80% of traditional banks actively strategized how to incorporate blockchain technology and cryptocurrencies into their business practices. Another 10% of banks were seriously considering offering their version of cryptocurrencies for public use.

However, since most cryptocurrencies are notoriously volatile when it comes to market valuation because they are decentralized and non-regulated, most traditional banks are looking to adopt the relatively stable Ethereum blockchain technology method. Over 30 banks, including Banco Santander and J.P. Morgan Chase, announced their plans in 2017 to develop proprietary fintech based on Ethereum’s blockchain technology.

But is this a realistic path forward for traditional banks wary of the rise of cryptocurrencies? Some experts believe that traditional money will become paperless, digital currency sooner or later, regardless of measures implemented by traditional banks or their preference for Ethereum-based blockchain.

And while revolutionary in concept, the traditional bank industry’s embrace of Ethereum and its accompanying blockchain technology has just as many drawbacks as benefits.

Will Ethereum, and its accompanying blockchain technology, ever replace traditional currency and cash transactions?

To address these issues adequately, we must first discuss the basics of the Ethereum cryptocurrency.

Ethereum 101

To understand why traditional banks are slowly embracing Ethereum and its blockchain technology and why most other cryptocurrencies aren’t, we have to first look at Bitcoin.

After the global financial crisis of 2008, Bitcoin and blockchain technology were first conceptualized in a whitepaper by the enigmatic Satoshi Nakamoto, an alias for an individual or group of people.

The concept for Bitcoin was to create a Defi currency system. In other words, the hope was to create a decentralized financial system for everyday people that do not rely on government regulation, central banks, traditional banks, or modern banking infrastructures.

The first Bitcoin and blockchain were launched in January 2009. Anyone can create Bitcoins using advanced computers to solve mathematical equations in a process called “mining.” The mining process is verified using cryptography software and recorded on a digital ledger called a blockchain.

Blockchain technology is virtually hacker-proof and can’t be falsified.

However, Bitcoin does have some drawbacks. The mining and verification process creates “blocks” that are added chronologically on the blockchain. However, due to the size of the blocks, transaction speeds are slow.

The Bitcoin blockchain can only process less than five transactions per second. For context, Visa can process over 1,700 credit card transactions per second.

And even though Bitcoin was conceptualized as a peer-to-peer decentralized finance transaction system, Bitcoins are more suitable as investment instruments than digital currency. It’s challenging to buy anything via Bitcoin. Also, Bitcoin’s financial market value is notoriously volatile.

Traditional banks are progressively embracing Ethereum because Ethereum’s blockchain design and its token Ether significantly improve Bitcoin and its blockchain platform.

Ethereum was launched in July 2015. And Ethereum was conceptualized as creating the next generation of cryptocurrencies, an update of Bitcoin, that can be securely and efficiently used for personal and business transactions.

Ethereum introduced a revolutionary product called decentralized applications, or “DApp.” You can create “smart contracts” on Ethereum, the digital ledger version of real-world legal contracts.

Online users can use Ethereum apps to create their signature cryptocurrencies and fundraising initiatives. And a recent upgrade of the Ethereum blockchain means that it can process over 100,000 transactions per second.

And all transactions on Ethereum are recorded on the blockchain and spread out on nodes on the entire platform instead of one centralized system. These are just a few of the reasons why traditional banks are finally amenable to embracing Ethereum’s blockchain technology for its purposes.

However, the embrace of traditional banks with Ethereum blockchain technology won’t happen overnight. Most traditional banks are still learning about the intricacies of cryptocurrencies. Furthermore, most traditional banks are willing to risk Ethereum, the second-largest cryptocurrency behind Bitcoin, and not other volatile cryptocurrencies.

Benefits and Drawbacks

While 80% of traditional banks consider implementing blockchain technology, especially Ethereum, it can have benefits and drawbacks.

Bank transactions of all kinds can become more secure via smart contracts and are executed near simultaneously.

Business transactions can be safe on the blockchain now. For example, crypto artists can directly sell their artwork via NFTs on blockchains proving the authenticity and sole ownership to a buyer.

The advent of decentralized apps on Ethereum can revolutionize how small businesses secure capital, fundraise and do business.

Bank transfers and remittances across international borders could be executed instantaneously instead of taking days to finalize with blockchain technology. This would also make transaction fees cheaper.

And traditional banks can try to slow down the advent of digital currency progress by ensuring that digital currencies exist side-by-side with traditional currencies and banking practices.

However, as interfaced with traditional banking practices and business philosophies, blockchain technology is untried and unproven. There will inevitably be false starts and technological teething periods before it is perfected.

And mining for cryptocurrencies uses a lot of electricity and is harmful to the environment. Bitcoin mining leaves a carbon footprint, or the emission of 37 megatons of carbon dioxide, on the Earth annually. That is the carbon emission footprint equivalent released by New Zealand.

No one is saying that traditional banking or currencies will disappear overnight. However, traditional banks are preparing for the inevitable future, perhaps decades from now, when paperless digital currency is the global norm.

Even though Bitcoin has increased in value by 430% recently, most traditional banks are more interested in Ethereum because of its relative market stability, blockchain technology security, and decentralized applications.

Ethereum may not obsolete and replace traditional currencies now, but it may be the blueprint for the future paperless digital currencies that traditional banks embrace.