ITECH1100: Cryptocurrency's Impact on the Banking Industry

This report, submitted by a student, investigates the potential impact of cryptocurrency on the banking industry. It delves into the core concepts of cryptocurrency, including its cryptographic basis and digital transaction processes, contrasting them with traditional centralized banking systems. The report explores the disruptive effects of cryptocurrency, particularly the shift towards decentralized control and the implications for international trade and financial regulations. It examines the role of blockchain technology, the regulatory landscape, and ethical considerations related to data security. The report also includes a video transcript that further illustrates the contrast between centralized and decentralized transaction systems. Overall, the report provides a comprehensive analysis of how cryptocurrency is reshaping the banking sector, the challenges it presents, and its potential future impact.

Running head: THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
The potential impact of Cryptocurrency on the banking industry
Name of the Student
Name of the University
Author Note

1THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
Table of Contents
Research...........................................................................................................................................2
Brainstorming..................................................................................................................................3
Regulation and Ethics......................................................................................................................3
Disruption........................................................................................................................................4
Video transcript...............................................................................................................................7
References........................................................................................................................................9

2THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
Research
The term cryptocurrency has been devised from the mixture of two words that are mainly
cryptography and currency. It is a form of a currency that is encrypted digitally to produce
economical assets (Böhme et al., 2015). The money generated in the form of cryptocurrencies is
used for digital transactions that are technically secured and verified. They are the digital assets
that are configured in such a way that their exchanges are cryptographically encrypted, additional
units are controlled and the whole transaction process of the assets is verified before initiation
(Iwamura et al., 2014). In the commercial world, they can be classified as a type of digital
currencies, alternative currencies and virtual currencies.
The transactional process of the cryptocurrencies is different to that of the modern
banking system. It is because the banking system is relied upon centralized electronic banking
systems whereas the cryptocurrencies are relied upon a decentralized control of transfer. This
decentralized control of transfer of the cryptocurrencies includes the presence of a blockchain
that is a public transactional database. The blockchain facilitates the transfer of the currencies
using a distributed ledger where the account of all the transactions taking place all across the
world is recorded (Iansiti & Lakhani, 2017). The information about every transaction is
forwarded to every active member of the blockchain so that any sort of discrepancy or falsity can
be avoided. This is the reason for which the system does not require a central authority to
maintain the integrity of the system. According to the protocols of the system, the system decides
whether there is a possibility of introducing a new cryptocurrency unit and if there is a possibility
of such, the system takes the charge of defining the origin of the cryptocurrency and how to

3THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
obtain the ownership of that new origin (Ali et al., 2014). The ownership of the newly originated
unit can be proved with the help of several cryptography techniques.
Brainstorming
With the advent of the cryptocurrencies in the process of leading with the transactions,
the banking industry is being disrupted due to the rise of these digital assets through several
ways. The cryptocurrencies uses a decentralized control for the transactions all over the world
for which it is affecting most of the real world currencies. Dollar is one of those currencies that
considered as a primary source of the global economy. It has been able to mark its dominance
through centralized banking in most of the countries. However, with a decentralized control, the
cryptocurrencies have been able to disrupt the centralized banking process (Pilkington, 2016). As
a consequence to this, the international trades, relations with the foreign entities, diplomatic
strategies along with the economic sanction are largely getting impacted.
Although, it is being apprehended that due to its decentralized nature, the
cryptocurrencies are going to play a huge role in the daily life by smoothening the flow of
transactions, several industries such as the payment sectors, governments along with the banking
industry is expected to face severe challenges in adapting to the exchange of economy of the
country (Bech & Garratt, 2017). The cryptocurrency is expected to boost up the economic
growth by allowing merchants to drop in with innovative business ideas and trade points.
Regulation and Ethics
According to Lawrence Lessig there are four regulators that regulate a particular entity.
These four regulators are the law, market, architecture and the norms. The laws are set by the

4THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
governments, the norms are set by the community, the market is set by the economical standards
and the architecture is set by the development and the urge of innovation (Katyal, 2013). The
banking industry uses a centralized system for which the information about the transactions and
the monetary exchanges are kept highly secured under strict supervision. However, the
decentralized transaction process of the digital currencies may lead to an infringement of the
personal accounts since it is not under a strict supervision. Therefore, it is evident from the fact
that there are no governmental laws for the blockchain (MacDonald, Allen & Potts, 2016). The
internal laws of the decentralized system include mandatory cryptocurrency accounts,
maintenance of a ledger and the right to information about all the transactions. An architectural
constraint relating to the technology of the transaction process of cryptocurrencies is the
inclusion of a blockchain, that is a public transactional database used for maintain the records of
all the transactions taking place in a particular period of time. Transactions though a blockchain
is expected to increase the efficiency of all the transactions.
Disruption
Cryptocurrency intends to change the process of transactional workflow in a particular
system of monetary exchanges (De Filippi, 2014). In the centralized form of the system that is in
the banking system the transaction generally takes place through the involvement of several third
parties or the intermediaries. In order to facilitate transaction through a centralized system it is
mandatory to have accounts on both the ends that is the account of the sender and the account of
the recipient. These accounts are in the safe custody of the individual banks on either of the side.
To have an exchange the sender must look into his banking account for his transfer of money and
with the help of a third party he should be able to send money to the account of the recipient. The

5THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
third parties have restrictions at times, are slower, involves extra charges and are closed in nature
(Ally, Gardiner & Lane, 2016).
Figure 1: Transaction through centralized system
(Source: Author)
However, the transactional procedure in case of a decentralized system involving the
transfer of the cryptocurrencies is a bit different to that of the transaction in the centralized
process (Fanning & Centers, 2016). The transaction of the cryptocurrencies takes place through
the help of a blockchain and a public network. The blockchain is a public transaction database
while the network is an open network. Being decentralized in nature, the transactions of the
cryptocurrencies does not involve any third parties. In order to send digital currencies, a sender
must have an encrypted account where the cryptocurrencies are stored and he can directly send
the assets to the recipient’s account through the help of the open network (Décourt, Chohan &
Perugini, (2017). This network is a peer to peer network that is much secured than the existing
bank accounts and supports instant transfer unlike the centralized networks. The involvement of

6THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
the blockchain in the network facilitates the transfer as it maintains the distributed ledger where
all the information about the transfer is stored.
Figure 2: Transaction through decentralized system
(Source: Author)

7THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
Video transcript
00:00 – 00:15: In the centralized form of the system [pause] that is in the banking system [pause]
the transaction generally takes place through the involvement of several third parties or the
intermediaries.
00:15 – 00:30: [pause] In order to facilitate transaction through a centralized system [pause] it is
mandatory to have accounts on both the ends that is the account of the sender and the account of
the recipient.
00:30 – 00:40: [pause] These accounts are in the safe custody of the individual banks on either of
the sides that is for both the receiver and the sender.
00:40 – 00:55: [pause] To have an exchange [pause] the sender must look into his banking
account for his transfer of money [pause] and with the help of a third party [pause] he should be
able to send money to the account of the recipient.
00:55 – 01:05: [pause] The third parties have restrictions at times, are slower, involves extra
charges and are closed in nature.
01:05 – 01:20: [pause] However, [pause] the transactional procedure in case of a decentralized
system involving the transfer of the cryptocurrencies [pause] is a bit different to that of the
transaction in the centralized process.
01:20 – 01:30: [pause] The transaction of the cryptocurrencies takes place through the help of a
blockchain and a public network. [pause] The blockchain is a public transaction database while
the network is an open network.

8THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
01:30 – 01:40: [paused] Being decentralized in nature, [pause] the transactions of the
cryptocurrencies does not involve any third parties.
01:40 – 01:50: [pause] In order to send digital currencies, [pause] a sender must have an
encrypted account where the cryptocurrencies are stored [pause] and he can directly send the
assets to the recipient’s account through the help of the open network.
01:50 – 02:00: [pause] This network is a peer to peer network [pause] that is much secured than
the existing bank accounts and supports instant transfer unlike the centralized networks.

9THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
References
Ali, R., Barrdear, J., Clews, R., & Southgate, J. (2014). Innovations in payment technologies and
the emergence of digital currencies.
Ally, M., Gardiner, M., & Lane, M. (2016). The potential impact of digital currencies on the
Australian economy. arXiv preprint arXiv:1606.02462.
Bech, M. L., & Garratt, R. (2017). Central bank cryptocurrencies.
Böhme, R., Christin, N., Edelman, B., & Moore, T. (2015). Bitcoin: Economics, technology, and
governance. Journal of Economic Perspectives, 29(2), 213-38.
De Filippi, P. (2014). Bitcoin: a regulatory nightmare to a libertarian dream.
Décourt, R. F., Chohan, U. W., & Perugini, M. L. (2017). BITCOIN RETURNS AND THE
MONDAY EFFECT. Horizontes Empresariales, 16(2).
Fanning, K., & Centers, D. P. (2016). Blockchain and its coming impact on financial
services. Journal of Corporate Accounting & Finance, 27(5), 53-57.
Iansiti, M., & Lakhani, K. R. (2017). The truth about blockchain. Harvard Business
Review, 95(1), 118-127.
Iwamura, M., Kitamura, Y., Matsumoto, T., & Saito, K. (2014). Can we stabilize the price of a
Cryptocurrency?: Understanding the design of Bitcoin and its potential to compete with
Central Bank money.
Katyal, N. (2013). Disruptive Technologies and the Law. Geo. LJ, 102, 1685.

10THE POTENTIAL IMPACT OF CRYPTOCURRENCY ON THE BANKING INDUSTRY
MacDonald, T. J., Allen, D. W., & Potts, J. (2016). Blockchains and the boundaries of self-
organized economies: Predictions for the future of banking. In Banking Beyond Banks
and Money (pp. 279-296). Springer, Cham.
Pilkington, M. (2016). 11 Blockchain technology: principles and applications. Research
handbook on digital transformations, 225.