Crypto and the Global Financial System: Will It Replace Traditional Banks?

Pratham Sandeep Ghadigaonkar.

Email : [email protected] / Contact no : 9653107108

(Student of department BAF, Sasmira’s institute of commerce and science)

Dr. Puja Ahuja

Email: [email protected] contact- 9702482435

 Abstract :

The rapid rise of cryptocurrencies and blockchain technology has raised fundamental questions
about the future of the global financial system. This research paper explores the potential for
cryptocurrencies, such as Bitcoin and Ethereum, to replace traditional banking institutions or if
they will coexist within a transformed financial ecosystem. The study examines the advantages
and challenges posed by decentralized finance , focusing on the key benefits of cryptocurrencies,
including lower transaction costs, financial inclusion, and faster cross-border payments,
compared to the current banking system .Despite their potential, cryptocurrencies face significant
hurdles to widespread adoption, including regulatory uncertainty, security risks, scalability
issues, and the volatility of digital assets. Traditional banks, while offering stability and
regulatory oversight, continue to dominate areas such as lending, consumer protection, and
wealth management. This paper investigates whether cryptocurrencies can disrupt these core
banking services or if a hybrid model will emerge, where banks integrate blockchain technology
and digital assets into their existing services.Through a mixed-methods approach combining
literature review, case studies, surveys, and expert interviews, the research identifies emerging
trends in the relationship between crypto and traditional banking. The findings suggest that while
cryptocurrencies are unlikely to fully replace traditional banks in the near future, they are poised
to transform the financial sector, with banks adopting crypto-related services and governments
exploring Central Bank Digital Currencies (CBDCs) as part of a hybrid financial system.This
paper concludes that the future of global finance will likely involve a coexistence of traditional
banking and cryptocurrency-based solutions, with both systems adapting to meet evolving
consumer needs, regulatory demands, and technological advancements. The study offers insights
into the potential regulatory frameworks and economic implications that will shape this evolving
landscape .This abstract summarizes the main goals, methodology, and conclusions of the
research paper, offering a concise overview of the study’s scope and findings.

 Keywords: Cryptocurrencies, Blockchain technology, Conventional banking,

Cryptocurrencies, exemplified by Bitcoin and stable coins, are exerting a significant influence on
the established banking system through the questioning of its traditional model, the modification
of payment mechanisms, and the potential restructuring of the regulatory framework. Studies
have revealed a robust positive connection between cryptocurrency market capitalization and
essential financial metrics such as the Dow Jones Industrial Average, Consumer Price Index, and
conventional banking activities, thus emphasizing the increasing importance of cryptocurrencies
in the global financial domain Despite offering seamless, secure, and rapid transactions,
cryptocurrencies also bring forth challenges such as security vulnerabilities, regulatory
ambiguities, and price fluctuations, underlining the necessity for a comprehensive understanding
of the associated risks prior to engaging in cryptocurrency investments or usage. The changing
dynamic between cryptocurrencies and traditional banking institutions highlights the imperative
need for the financial sector to adapt to the shifting landscape of digital economics. The objective
of this study is to assess the influence of cryptocurrencies on the conventional banking sector
through a synthesis of existing literature and an examination of recent data.

 LITERATURE REVIEW

The role of cryptocurrencies in the global financial system has been widely discussed, with
varying perspectives on whether they can replace traditional banks. Early studies by Nakamoto
(2008) introduced Bitcoin as a decentralized digital currency designed to bypass traditional
financial intermediaries, thus sparking debates on the future of banking systems. Since then,
extensive literature has emerged to explore both the potential and challenges of cryptocurrencies
in this context.One key area of focus has been the advantages of cryptocurrencies. Studies by
Catalini and Gans (2016) highlight the cost efficiency, speed, and transparency enabled by
blockchain technology, which underpins most cryptocurrencies. These attributes are seen as
particularly transformative in cross-border payments and remittances, traditionally dominated by
banks and payment services like SWIFT (Narayanan et al., 2016). Furthermore, crypto’s ability
to provide financial services to the unbanked, particularly in regions with limited access to
traditional banking infrastructure, is often cited as a major benefit (Narula & Sharma,
2021).However, the limitations of cryptocurrencies are also well-documented. Volatility
remains a significant barrier to mass adoption, with many studies (e.g., Yermack, 2013)
emphasizing the instability of crypto markets compared to traditional currencies. Regulatory
challenges are another concern; authorities worldwide are still developing frameworks to address
issues such as anti-money laundering (AML), taxation, and consumer protection (Zohar, 2021).
Traditional banks, with their established trust, consumer protections, and regulatory oversight,
remain better positioned for roles like lending, savings, and wealth management (Hassan et al.,
2020).Recent work by DeFilippi (2020) suggests that cryptocurrencies are more likely to
complement traditional banking systems rather than replace them entirely. The rise of Central
Bank Digital Currencies (CBDCs) and the increasing integration of blockchain by banks point
toward a hybrid system, where traditional banks adapt to new technologies rather than being
fully displaced by them.In summary, while cryptocurrencies offer significant promise, their
widespread adoption faces regulatory, economic, and technological challenges, making a full
replacement of traditional banks unlikely in the short term.

 Objective of the Study:

1. Disruptive Potential of Cryptocurrencies

 Hypothesis:

"Cryptocurrencies, driven by blockchain technology and decentralized finance , will not fully
replace traditional banks in the global financial system in the foreseeable future but will lead to a
transformation of the banking sector, prompting banks to integrate crypto-related services into
their offerings, thus creating a hybrid financial system."

 Research Methodology :

Literature Review: A thorough review of existing literature will provide foundational knowledge
on cryptocurrencies, blockchain technology, and the traditional banking system. This review will
help identify key themes, gaps, and theoretical perspectives regarding the relationship between
digital currencies and banks.

Case Study Analysis: Case studies of countries and regions with advanced cryptocurrency
adoption, such as Switzerland and Estonia, will be examined to assess real-world examples of
crypto integration into the financial system. This analysis will focus on how traditional banks are
adapting to crypto, such as adopting blockchain for payments and providing crypto-related
services.

Surveys and Interviews: Primary data will be collected through surveys and semi-structured
interviews with financial experts, regulators, and consumers. The surveys will assess attitudes
toward crypto adoption and traditional banking, while interviews will provide deeper insights
into the views of industry professionals regarding crypto’s disruptive potential.

Comparative Analysis: A comparative analysis will be conducted to examine the strengths and
weaknesses of cryptocurrencies versus traditional banks in key areas such as cost efficiency,
security, accessibility, and regulatory compliance. This will help identify how each system
addresses consumer needs and potential barriers to widespread adoption of crypto.

Economic and Financial Modeling: Economic models will be used to simulate the potential
impact of cryptocurrency on global financial markets, considering factors such as market
stability, monetary policy, and international trade.
  Data analysis and interpretation:

The above chart shows that 54.2% respondence think decentralization finance platform would
impact the traditional banking system. 12.5% respondence doesn’t think that finance platform
wouldn’t impact the traditional banking system. 33.3% respondence are not sure about it.
The above chart shows that 41.7% respondence think in future crypto will take over the
traditional banks. 20.8% respondence doesn’t think that crypto will take over the traditional
bank. 37.5% respondence are not sure about it.
 Findings : Chatgpt and Article DOI: 10.47191/jefms/v7-i8-40, Impact Factor: 8.044

 Conculusion :

In conclusion, the research on Crypto and the Global Financial System: Will It Replace
Traditional Banks? suggests that while cryptocurrencies possess significant transformative
potential, they are unlikely to fully replace traditional banks in the near future. Instead,
cryptocurrencies and traditional banks are more likely to coexist in a hybrid financial system,
with each playing complementary roles.Cryptocurrencies, driven by decentralized finance (DeFi)
and blockchain technology, offer several advantages over traditional banking systems, including
lower transaction costs, faster settlement times, and enhanced financial inclusion. They have the
potential to disrupt certain banking services, such as cross-border payments, remittances, and
micro-lending, by offering more accessible and efficient alternatives. However, widespread
adoption faces significant barriers, including regulatory uncertainty, price volatility, scalability
issues, and concerns about security and fraud.Traditional banks, on the other hand, continue to
offer essential services that cryptocurrencies cannot yet fully replicate, such as regulated lending,
consumer protection, and trust. Banks are also better equipped to manage systemic risks and
provide financial stability, which cryptocurrencies still struggle to achieve due to their
decentralized nature and market volatility.A more likely scenario is that traditional banks will
adapt by incorporating crypto-related services, such as offering digital asset management,
blockchain-based payment solutions, and facilitating cryptocurrency trading.

 Bibliography:
1. Narayanan, Arvind, et al. Bitcoin and Cryptocurrency Technologies. Princeton University
Press, 2016.
2. Catalini, Christian, and Joshua S. Gans. "Some Simple Economics of the Blockchain."
Communications of the ACM, vol. 59, no. 11, 2016, pp. 24-25.
3. Bryant, John. "Will Cryptocurrencies Replace Traditional Banks?" The Financial Times,
2023.
4. Zohar, Ittay. "The Blockchain as a Distributed Trust Machine." Communications of the
ACM, vol. 59, no. 12, 2016, pp. 36-45.