Differences Between the Financial Traditional System and Cryptocurrencies
Over a decade ago, the first cryptocurrency to permit secure transactions (bitcoin) changed the fintech world. It is based on cheap peer to peer transactions and is designed to be completely decentralized.
This digital evolution was set up to eliminate the centralized model of managing finances that monopolized the industry. However, a virtual currency based on blockchain technology has remained in the speculative emerging finance growth category over the years. That means we are still heavily reliant on the traditional financial systems that cryptocurrency seeks to undermine.
The traditional financial industry has evolved from handing gold, silver, and paper currencies to trying out digital transfers from credit and debit cards. In all this time, one thing has remained constant, its rigid centralization system for handling money. This need for intermediaries is not only costing us a good penny but has also proven to be a lengthy process to deal with.
Needless to say, we need to keep an eye on emerging technologies, like blockchain, to discover more effective ways to manage our finances. Technology continues to evolve and develop new management systems to fix the previous system’s weaknesses. Therefore, it’s imperative to look into the discoveries and not wait for a decade to pass before we make a move.
In that rationale, it is only wise for us to compare traditional financial systems and the cryptosystem.
Every financial system comes with its complexities, benefits, and downfalls. Therefore, we need to evaluate the differences between the two and whether they can coexist or oust each other. In this article, we will look at various features in both systems and compare their functionalities.
Features of Traditional Financial Systems
At the center of every traditional financial system are money and its consequential trade. The primary goal of an economic system is the exchange of goods and services through trade. A financial system comprises financial institutions such as banks, tradable assets such as money, and financial services such as stock brokerage.
We can’t possibly talk about traditional financial systems without looking into what money is.
What is Money?
This is a medium of exchange that stores value and is a unit of measure for value. This value only exists because people accept it to represent something and use it to trade.
The national government mostly issues money with each nation having its own ‘fiat’ money such as Euro, dollar, or shilling. This means that the stability of the currency relies on the state of the government issuing it. Hence, the stronger the government’s economy, the stronger the value of their money and vice versa.
The financial institutions such as banks are in charge of controlling money transactions, with each government having a central bank. The whole economic system depends on trust in its central bank to validate how money is spent. The transactions happen digitally; therefore, the notes, coins, and bills are just a representation of value.
Traits of Money
For money to be useful for trade, it should be:
- Divisible: can be broken down into smaller amounts
- Non-consumable: cannot be used for purposes other than the exchange of value
- Portable: easy to carry around
- Secure: cannot be counterfeited
- Scarce: cannot be replicated without end
- Recognizable: accepted as a representation of value
- Durable: doesn’t depreciate over time
- Easily transferable
- Fungible: each piece shares the same value as its equivalent
Now that we’ve covered traditional financial systems, let’s see how emerging cryptocurrency systems differ from old money systems.
Difference Between Traditional Financial Systems and Bitcoin
- Centralized vs. Decentralized
The most significant difference between the two is that where traditional financial systems are centralized, cryptocurrencies, such as Bitcoin, use a decentralized network outside banks or government control.
Cryptocurrency lacks intermediaries when conducting transactions and does not need to be backed by any government to be considered valuable. This digital currency relies on a decentralized ledger technology that is maintained across several networks.
Whereas central banks in traditional financial systems are responsible for ensuring the same money isn’t spent twice, in cryptocurrency systems, each network member is responsible for verifying and validating transactions.
It’s an independent peer-to-peer transaction where all the network members are equal, and no one has superiority over the other.
- Fees and transaction time
The elimination of a centralized body controlling transactions also eliminates the fees charged and prolonged translation times. Banks and other financial institutions charge high prices for operation made and sometimes take days to confirm.
Cryptocurrency transactions are conducted over the internet and charge little to no fees. The time frame for transaction confirmation is also reduced considerably, with sanctions coming in almost instantly.
The centralized systems of traditional finance require a third party to manage your finances. If this system is compromised, then the security of your financial data is in jeopardy too. Cryptocurrency opens the doors to safe global and local transactions. As a user, you are in charge of your finances. The peer to peer systems does not depend on any centralized body that can put you at a financial breach risk. The system uses cryptography to protect your assets and hold off hackers.
- Anonymity and Access
Centralized financial institutions offer credit or debit cards that have the owners personal information attached. These cards are used to track your spending and activities and lead to identity theft when in the wrong hands.
On the other hand, cryptocurrency transactions are entirely anonymous, with no personal information (unless you add them). There’s little to no chance of identity theft happening, and your privacy is respected.
Digital currency exists on the internet and is easily accessible, whereas traditional currency requires a set time to access financial institutions.
Cryptocurrency is bridging a gap that traditional financial systems have yet to try and fix. However, people are still hesitant to pick it up as a monetary system, so the conventional financial system is monopolistic.
Cryptocurrency is the right step in the evolution of banking and financial management. As the technology evolution continues, we are hopeful that the two systems’ hybrid models take center stage in the financial industry.