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António Henriques is CEO and member of the Board of Directors at Bison Bank and Chairman of the Board of Directors at Bison Digital Assets.
In the rapidly evolving world of finance, cryptocurrencies are challenging the dominance of traditional fiat currencies. As these two financial realms intersect, we are witnessing the dawn of a new era in global finance, where the innovative potential of digital assets meets the stability of traditional money. The question is not if crypto and fiat currencies will converge, but how and when.
Cryptocurrencies such as Bitcoin and Ethereum have captured global attention. Their decentralized nature, robust security, and potential for high returns have attracted millions of investors. Bitcoin, often referred to as digital gold, has become a store of value for many, while Ethereum’s smart contract functionality has opened a plethora of applications beyond simple transactions.
Over the past decade, the combined market capitalization of Bitcoin and Ethereum has grown exponentially, from under USD 1 billion in 2013 to over USD 1 trillion by 2023. However, their integration into mainstream finance has been slow due to regulatory concerns and market volatility.
Fiat currencies, such as the dollar, euro, or yuan, remain the backbone of the global economy. Regulated by central banks and governments, they offer stability and widespread acceptance, which cryptocurrencies currently lack. The predictability of fiat currencies makes them suitable for everyday transactions and long-term financial planning. Central banks can influence economic conditions through monetary policy, providing a higher level of control and stability. Over the past decade, the combined market capitalization of the dollar, euro, and yuan has seen significant growth. For instance, to provide a reference for how this market compares with cryptocurrencies, the US dollar market capitalization increased from approximately USD 10 trillion in 2013 to over USD 20 trillion by 2023, considering only domestic companies listed at the end of the year and excluding investment companies, mutual funds, and other collective investment vehicles.
The challenge lies in merging the flexibility of cryptocurrencies with the stability of fiat currencies. Several initiatives are underway to address this challenge.
This technology is being explored to enhance the efficiency and transparency of traditional financial systems. Blockchain’s decentralized ledger system can provide a more secure and transparent way to record transactions, reducing the risk of fraud and error. Major banks and financial institutions are investing heavily in blockchain research and development, indicating a growing convergence of crypto and fiat currencies.
Cryptocurrencies pegged to stable assets such as gold or fiat currencies are promising. These aim to combine the stability of fiat currencies with the efficiency of blockchain, making them suitable for everyday transactions. By pegging their value to a stable asset, stablecoins reduce the volatility that plagues many cryptocurrencies, making them more practical for use in commerce and as a store of value.
CBDCs are digital versions of fiat currencies issued by central banks. They combine the benefits of digital currencies with the stability and trust associated with central-bank-issued money. Countries such as China, with its digital yuan, and Sweden, with its e-krona, are leading the way in CBDC development. These digital currencies could provide a bridge between the traditional financial system and the world of cryptocurrencies. However, central banks need to take certain steps for CBDCs to interact with the current blockchain ecosystem. If not, this initiative will take longer, and stablecoins will play that role.
Worldwide, regulatory bodies are developing regulations to recognize the potential of cryptocurrencies and are working on creating frameworks to govern their use, providing the necessary legal and regulatory certainty for businesses and consumers to adopt cryptocurrencies. The Financial Action Task Force has issued guidelines for the regulation of virtual assets, aiming to prevent their misuse for money laundering and terrorist financing. In the USA, the Securities and Exchange Commission and the Commodity Futures Trading Commission are actively involved in defining the regulatory landscape for cryptocurrencies. The European Union introduced the world’s first comprehensive cryptocurrency regulations — known as the Markets in Crypto-assets Regulation or MiCAR — in May 2023. Hong Kong and Singapore have taken significant steps to regulate cryptocurrencies while encouraging industry growth.
As the financial landscape evolves with the integration of blockchain technology and cryptocurrencies, upskilling is truly important. Traditional banking skills are no longer sufficient; professionals now need to understand blockchain, smart contracts, and the regulatory environment surrounding digital assets. The real gap lies not just in technical skills but also in the ability to adapt to a rapidly changing environment. Financial institutions must foster a culture of innovation and agility, encouraging employees to embrace new technologies and methodologies. This includes developing critical thinking and problem-solving skills.
The integration of cryptocurrencies and fiat currencies is set to revolutionize the financial services industry. Decentralized finance platforms leveraging blockchain technology are already showcasing the potential of this convergence by enabling users to lend, borrow, and trade assets directly, reducing reliance on traditional intermediaries. This shift promises lower costs and increased access to financial services, particularly in underserved markets. The merging of crypto and fiat represents a significant shift in finance, with ongoing developments in stablecoins, blockchain technology, regulatory frameworks, and CBDCs pointing towards a future where the lines between crypto and fiat are increasingly blurred. Embracing blockchain technology can enhance efficiency, security, and transparency in financial institutions. The future of financial services with blockchain is not just about integrating new technologies but also about rethinking traditional financial models to create a more resilient and adaptable financial ecosystem. This transformation will require collaboration between regulators, financial institutions, and technology providers to ensure a seamless and secure transition to this new era of finance.
Declaration of interest
Bison Bank is an interested party and an active participant in the referred and ongoing global revolution. It is the only bank in Portugal and one of few in Europe that offers its clients a global and diversified range of financial products and services, together with the exchange and custody of virtual assets through its virtual asset service provider subsidiary, Bison Digital Assets. Furthermore, Bison Bank is partnering with Henley & Partners, which facilitates the payment of its client fees through a deposit of cryptocurrency in a Bison Digital Assets account in Portugal.
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