The advent of crypto and blockchain technology have a significant impact over the traditional banking system which offers innovative opportunities and formidable challenges. The banking system has evolved from the primitive age to standardized paper currency which is fully controlled by the government to regulate financial growth. In the XXI century, with the emergence and integration of the concept of digitized currency such as Bitcoin has redefined the financial transaction which is decentralized and secure as well as more transparent due to blockchain technology.

The concept of cryptocurrency with a promise of faster, cheaper, securer and transparency in comparison with the traditional banking poses a set back to the traditional banking system. However, the volatility of crypto, security measures and the uncertain regulatory frameworks are the major hurdles.

This paper explores the historical context of the currency, evolution and impact of cryptocurrency on the traditional banking system, highlighting the case study of the banks which adopted the digital currencies and blockchain technology. This paper also examines the future coexistence and convergence of traditional banks with the cryptocurrency. It also put emphasis on the associated opportunities and risk factors with the emergence of crypto and blockchain technology in the traditional banking system. It also discusses customer education through webinars and seminars so that customers can invest in cryptocurrencies efficiently. The under given paper emphasized the need to balance the innovation with caution with the adaptation of this new financial frontier.

In ancient times, people used to have numerous methods for trade and commerce. People and the communities used to exchange the beads, shells, metals such as gold, silver and brass as a currency. But as soon as the international trading system emerged the need for standardization of the currency was needed. In the seventh century, Tang Dynasty of China used forerunner of today's banknotes was "Flying Money" which only can be used by the government officials and wealthy merchants and later on issued for public use by Song Dynasty of China in tenth century, which is the first known example of currency note1

With the emergence of financial and economic growth worldwide paper currencies developed further which gives the government more control over the monetary policies by controlling money supply and adjusting the interest rate for the purpose of economic growth and development.

In the twenty-first century, with the emergence of digital currency such as Bitcoin has broadened the concept of currencies. Though the digital currencies have no general recognition as a payment method, they are secured and decentralized by the cryptographic algorithm which is based on blockchain technology. Blockchain is a technology which operates without any central entity such as any bank or government and also it has potential to change the way of transactions and in managing the data. This technology is also efficient in decentralization and securing the data in addition to cutting out the middleman and minimizing deceptive practice.

From the investors point of view, cryptocurrency also has some advantages such as non-seizure by government institutions and tax free transactions. Moreover, payments can't be tracked assuring the more protection of the data with the strict privacy. However, there are still some risks involved such as corrupting data by virus, crashed hard drive as well as hackers attack.

The digital currencies such as Bitcoin, Ethereum, Ripple e.t.c. are the digital assets which are used as a medium of trade with non-intervention of government or group, instead all users have collective retention as it is a decentralized one but being based on the blockchain technology. The use of cryptography provides a secure financial transaction and verifies the assets movement.

Unlike the traditional currencies of paper and coin, crypto currencies are the representation of values digitally. The blockchain technology working behind the cryptocurrencies are unique for each crypto and this tech is a distributed database or ledger in which all transactions being recorded are related with virtual currency. The only drive of the price of digital currencies is the demand and supply and that is why these are so volatile in nature.

Records,
The history of cryptocurrency is pretty interesting as it was started in the form of a theoretical phenomenon and evolved into globally accepted digital currency. Firstly in 1982, David Chaum published whitepaper, the first digital bearer instrument "Blind Signatures for Untraceable Payments2" which laid the foundation of digital currencies which was known as ECASH. Later on HASHCASH3 was invented by Adam Black in 1997 which was not the currency but a proof of work algorithm used for denial of service countermeasure techniques which later on influenced the bitcoin mining function. Then the earliest concept of decentralized currency Bit Gold was proposed by the blockchain pioneer Nick Szabo in 1998. Although it was never being implemented, it was considered as the forerunner to Bitcoin of Satoshi Nakamoto's protocol.

In 2008, a whitepaper titled "Bitcoin: A Peer to Peer Electronic Cash System4" with no trusted third party, published by Satoshi Nakamoto, the pseudonyms creator of bitcoin, is the most significant mystery of the world as the creator is not known whether he is an individual or a group of individuals. Bitcoin is a decentralized currency which works on the blockchain technology. It was first made available to the public in Jan 2009 in the form of a software known as "Genesis Block"5•

Cryptocurrencies introduced a new set of principles in the financial world, which offers the alternatives of traditional banking systems and methods of transaction. The tech behind the crypto promises the faster, secure and the cheaper transaction comparatively in addition it also provides the financial services without using the traditional banking. Moreover, in case of cheaper transaction cost it provides the peer to peer transaction operated on a decentralized network which reduces the number of intermediaries. Which results in reducing the transaction costs especially in case of cross border transactions.

Cross border transactions are the transactions between the payer and payee both in different countries and these payments are essential for the global trading which is time taking, hefty cost and a non transparent process. Crypto, particularly stablecoin(cryptocurrency whose value is pegged to another asset such as fiat currency such as US dollar or gold to maintain stable price and to reduce volatility of cryptocurrencies), made a revolution in cross border payments. Stablecoin provides the advantage over the traditional banking system. It facilitates payment by making it swift and secure which make them an ideal solution for global trading.

Cryptocurrency has the potential to change delivery of banking services in developed and emerging financial markets. In the case of payment services it can not only reduce the transaction time but also can increase the transparency and security through the distributed ledger technology. Moreover, crypto can also change the current or traditional bank products such as loans by creating higher quality loan portfolios at lower risk.

In 2021, a bank named Goldman Sachs6 had launched its first cryptocurrency, Ethereum derivative products. Another example who accept the crypto is Garanti BBVA Digital Assets7, offering to the customers transferring and storing of Bitcoin, Etherum and USD coin assets on Garanti BBVA Crypto, a mobile platform of the Garanti BBVA.

On 04 Jan 2021, the total market value of supplied cryptocurrency was 876.58 B$ which reached to 2.85 B$ on 15 Nov 2021 which again shattered to 798.55 B$ on 02 Jan 2023 and in the beginning of this year that is on 04 Jan 2024 it was again at 2.67 B$ and recently on 26 Aug 2024 was on 2.25 B$8. The given data shows how volatile the crypto is in nature.

The fact that cryptocurrencies are used as assets rather than being a substitute of money as currency creates an opportunity for the lenders to offer their assets in the form of cryptocurrency as a collateral and borrow money from banks and expand their business. The crypto lending parties to the agreement have a smart contract which is self executing, automatic payout, liquidation of collateral upon default as well as the release of collateral upon the completion of agreement.

Moreover, due to high market price fluctuation, the extreme volatile nature of crypto when there is margin call of collateral occurs then there is requirement to add some more collateral to maintain the loan agreement and if the required collateral is not fulfilled then there is liquidation of the collateral which causes the financial loss.

Moreover, with the emergence & steady growth of crypto and digital currencies there is a profound as well as multifaceted impact on the traditional banking system such as conventional financial operations. With a continuous growth of blockchain technology and digital assets, banks are facing the challenges.

• JPMorgan Chase
  • JPM Coin: JPMorgan Chase has developed its own stablecoin named JPM Coin. This coin facilitates the complex challenge in cross-border transactions and offers the next level of corporate treasury services. It serves as a payment rail and deposit account ledger. JPMorgan provides its services successfully in digital solutions enabling instant transfer as well as clearing of multi-bank and multi-currency assets on the permissioned distributed ledger.
     
• Revolut
  • Revolut: Revolut, a United Kingdom based bank, offers its services in cryptocurrencies based on the location of blocking, freezing, and returning deposits and withdrawals.
     
• DBS Bank
  • DBS Digital Exchange: DBS Bank, a Singapore based bank, has launched its own digital currency DBS Digital Exchange (DDEx). DDEx has fully integrated access to tokenize, trade, and custody digital assets. DDEx is a member-only exchange, where it offers participants such as accredited investors, financial institutions, and family offices.
     
• ANIMA Bank AG
  • ANIMA Bank AG: ANIMA Bank AG, a Switzerland based bank, previously famously known as SEBA Bank AG, is a fully licensed Swiss crypto bank. This bank operates globally and offers both traditional and crypto-based services to its clients. ANIMA Bank AG is regulated by the Swiss Financial Market Supervisory Authority (FINMA).
     
• Silvergate Bank
  • Silvergate Exchange Network (SEN): Silvergate, a California based bank, operated a real-time payment system called SEN which enables the holding of deposits or making loans to crypto as well as in traditional ways. However, according to a report by the Congressional Research Service, despite increasing from 1% to 98% between 2014 to 2021, the bank faced challenges in providing cryptocurrency services.

The present and on going evolution of the financial landscape due to emergence of the crypto and blockchain technology, present many aspects of how traditional banks may coexist and compete with these advanced emerging technologies. Banks integrated the concept of crypto and blockchain technology offering customers a wide range of services such as the traditional as well as crypto based services.

The coexistence of banks with the crypto world is possible with the partnership of fintech companies and crypto exchanges, to develop and offer innovative services. The trend of collaboration between banks and the fintech companies will grow in the coming time as banks have to adopt the digital banking capabilities to exist in addition to it adopt the development to keep up the changing digitized need of the customers.

Moreover, in this competitive era with cryptocurrency and decentralized finance platforms, bank's role is being challenged in the financial sector. Decentralized finance platform is the decentralized alternative of the traditional banking system which offers the lending, borrowing, trading and other services without intermediaries which lowers the fees and enhances the return due to which the dominance of traditional banks challenge.

The customers are attracted towards the speed, transparency and convenience of decentralized finance which also pressurizes banks to adopt the latest technology. Banks are exploring ways to collaborate with the decentralized finance firms to improve financial inclusion and economic growth as well as to reduce the cost and increase the efficiency and returns in addition to attracting the customers and users.

Another important aspect for the future emergence of crypto in traditional banking is the enhancement of customer education to use the digital currencies so that there is globally acceptance and adoption. The present aspect of the use of digital currency is very low to no use in the developing or under developing countries while in the developed countries the use of digital currency is known to maximum still is in use of a very few. The main reason behind it is the lack of education related to digital currency.

For example, in a country such as India, people today also trust on traditional banking rather than the digital use of it. In such a case the acceptance and adoption of digital currency in India like countries is a little bit hard. The ultimate solution is to develop a step by step guide on how to buy, sell, store and transfer the digital currencies and to host regular seminars as well as the webinar, online workshop, Question & Answer sessions to encourage the users.

Opportunities:
New financial inflows, Banks can generate revenue by offering services such as crypto trading and investment which can attract both retail and institutional users. As the number of users increases significantly banks may earn significantly by having a nominal fee for transactions.

• Strengthened customer connections: Banks may attract young and digitally enthusiastic customers by offering crypto services, which could enhance long-term customer relations. Banks may also enable diversification of customer portfolios, positioning them as comprehensive financial service providers.
   
• Creativity and strategic advantage: By early adoption of crypto and blockchain technology, banks may become industry leaders, distinguishing themselves from competitors who are slow to adopt. Pioneering banks in adopting and integrating crypto and blockchain technologies could also have the opportunity to influence future regulatory frameworks, providing them with future landscape advantages.
   
• Broadened financial accessibility: By integrating crypto and blockchain technology, banks may reach underbanked populations, particularly in areas with limited or no access to traditional banking. This may offer financial support in microfinancing, small business, and individual-level services.

Risks
Uncertainty in regulation, with the emergence of regulatory framework there are significant challenges. Any association or individual having illegal activities such as money laundering or the terrorist funding through crypto may damage the bank's reputation. To handle these situations banks must have robust protocols such as Anti-Money laundering and Know Your Customer.

Market volatile nature, the high financial risk may be associated with the volatile nature of crypto currencies. Banks may face drastic loss during the downturn of the market. The unpredictable liquidity of certain crypto currencies may lead to challenges in customer withdrawal demand, transactions in addition to customers can have significant credit risk if the borrower is unable to pay the loans.

Security and reputational risk, the prominent threat associated due to the integration of digital currencies is cyber attack such as hacking, phishing and ransome attack. Securing crypto requires advanced security such as multiple wall protection of anti cyber attacks. The implementation and maintenance of crypto requires advanced technical expertise and a complex system so that it is hard to breach.

Technology and security risk, any financial loss due to crypto related scam or due to any technical issue, the bank may be accountable to the customer which leads to reputational and financial loss to the bank too. Bank must ensure the proper communication to the customer related to financial loss as well as the bank must ensure the adequate customer protection from financial loss. Banks must adopt the proper crypto services as lack of proper services and poor data protection may lead to bank's permanent reputation loss.

Conclusion:
The integration of cryptocurrency has profound challenges as well as opportunities for the traditional banking system. Cryptocurrencies based on the blockchain technology provides the innovative financial solution which promises the faster, more secure, more transparent, cost effective specifically in the cross-border transactions. With the emergence of decentralized finance platforms, there is another challenge for the banks as the decentralized finance platforms provide the intermediary free transactions which are cost efficient and more transparent due to which customers attract.

However, there are risks involved due to the emergence of the crypto and blockchain technology to the traditional banks. The volatile nature of crypto, uncertainty in the regulatory framework as well as the security threats associated with the digital currencies pose a significant challenge for the traditional banking system. There is substantial financial loss due to the market fluctuations and the compliance being complicated due to the evolution of the regulatory landscape. Moreover, the threat of cyberattacks such as phishing needs a more advanced technical multilayered framework which requires significant expertise in addition to investment.

Regardless of the risks associated with the crypto and blockchain technology, the potential benefits of these tech, is substantial. Banks who are pioneers in the emergence and integration of digital currencies can position them as the financial market leaders as well as attract new customer segments. In addition to it, banks can also serve the underserved population which has little or no access to the banking system. By adopting the crypto and blockchain technology banks can improve its operational efficiency and reduce the operational cost.

Ultimately, to achieve the new setlines traditional banks must have a reasonable balance between the innovation and the risk management. Banks must invest in customer education and ensure that they trust in digital currencies. To thrive in the new era, Banks must collaborate with the fintech companies and decentralized finance platforms to offer its services efficiently and also to provide the robust securities against the cyberattacks to ensure the customer trust. As the financial dimensions continue to grow, banks which adopt the opportunities provided by crypto with the associated risk management effectively will be well positioned in the upcoming era.

End Notes:

1. First paper money, Guinness World: https://www.guinnessworldrecords.com/world-records/first-paper-money (last visited Sept. 7, 2024).
2. ECash, Chaum: https://www.chaum.com/ecash (last visited Sept. 7, 2024).
3. Hashcash, Hashcash.org: http://www.hashcash.org (last visited Sept. 7, 2024).
4. Who Created Bitcoin? Satoshi Nakamoto: Anonymous Creator of Bitcoin, the World's Leading Cryptocurrency (last visited Sept. 9, 2024).
5. Investopedia, Genesis Block: https://www.investopedia.com/terms/g/genesis-block.asp (last visited Oct. 4, 2024).
6. Goldman Sachs begins trading its first ever Ethereum derivatives products, The Trade News: https://www.thetradenews.com/[exact-url] (last visited Sept. 6, 2024).
7. Garanti BBVA Digital Assets now offers crypto custody to all customers on its Garanti BBVA Crypto mobile platform, NEWS BBVA: https://www.bbva.com/[exact-url] (last visited Sept. 6, 2024).
8. Market Cap Breakdown Chart Live Cryptocurrency Charts & Market Data, CoinMarketCap: https://coinmarketcap.com/[exact-url] (last visited Aug. 29, 2024).
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10. Cryptocurrency, Revolut United Kingdom: https://www.revolut.com/[exact-url] (last visited Aug. 29, 2024).
11. DDex: Digital Assets and Crypto Trading in Singapore, DBS: https://www.dbs.eom.sg/[exact-url] (last visited Aug. 29, 2024).
12. DDex: Digital Assets and Crypto Trading in Singapore, DBS: https://www.dbs.com.sg/[exact-url] (last visited Aug. 29, 2024).
13. SEBA Bank rebrands to AMINA Bank, Amina Group: https://www.aminagroup.com/[exact-url] (last visited Aug. 29, 2024).
14. The Role of Cryptocurrency in the Failures of Silvergate, Silicon Valley, and Signature Banks, Congress.gov: https://www.congress.gov/[exact-url] (last visited Aug. 30, 2024).

Written By: Mayank Agarwal, DNLU Jabalpur LL.M.