Integration of Cryptocurrency with Traditional Banking Systems

Recently, cryptocurrency is proving to be a game-changer in investment and money-making. It is decentralized, without government interference or control, and offers unparalleled autonomy that no other traditional banking system can match. Therefore, many investors want to diversify their portfolios and benefit immensely by earning huge returns. With cryptocurrencies slowly becoming mainstream, it is therefore necessary to integrate them with conventional banking systems. However, several challenges must be addressed beforehand to realize digital currencies’ full potential.

Most traditional banks hesitate to work with cryptocurrencies due to data theft, fund diversion, money laundering, online fraud, phishing, and hacking. Moreover, the technical complexity of cryptocurrency integration with existing banking systems can be nightmarish for novices. Despite all these challenges, there are credible solutions and experts like “UniPayment” that can bridge the gap between traditional banking and cryptocurrencies. The future definitely looks bright. In this blog post, let’s get an insight into the hindrances or challenges in linking cryptocurrencies with traditional banking and finding the right solutions for overcoming those obstacles.

Regulatory Challenges – A major hindrance in linking crypto with the traditional banking system is the regulatory framework and its subsequent compliance. Almost all conventional banks are subject to stringent regulations like Know-your-Customers (KYC) and anti-money laundering (AML) policies. And, as cryptocurrencies are usually considered as ‘high risk’ due to their decentralized characteristics, it makes it difficult for the conventional financial institutions like banks to strictly comply with these government regulations for checking frauds and illegal transactions.

Technical Hindrances – This is one major challenge in regards to integrating digital currencies like Bitcoin (BTC) with traditional banking infrastructure. As regular banking systems are built around ‘legacy’ technologies, it is not equipped to handle the critical technology behind the functioning of cryptocurrencies like smart contracts, crypto wallets and decentralized ledgers.

Security & Privacy Concerns – One of the major concerns linked to cryptocurrencies is the aspect of security, which has become even more important after recent bank runs at some ‘crypto-friendly’ financial institutions. As cryptocurrencies have a history of being targeted by infiltrators and hackers, there are several incidents when high-profile accounts have been hacked, and huge amounts of cryptocurrency being stolen. Therefore, traditional banks are always concerned about the security risks associated with digital currencies and might not possess adequate resources or technical expertise to tackle these risks effectively.

Lack of Understanding – Another major hindrance in linking crypto with traditional banking is the lack of mutual and technical understanding that exists between the two parties. Therefore, the key aspects of ‘trust factor’ and technical know-how must be high in traditional banking and cryptocurrency integration across the board. As cryptocurrency is a relatively new technology based upon blockchain, a majority of traditional banks are unable to understand how it functions and the ways through which it can be integrated into an existing digital payment system or infrastructure. This is why traditional banks need to take extra precautions to strictly adhere to the predefined regulations and best practices in this dynamic service-based industry.

How to Overcome These Integration Obstacles?

There are several time-tested and proven solutions that can help bridge the gap between digital currencies and traditional banking systems, despite challenges like security concerns, technical limitations, and regulatory compliance.

Today, a lot of countries are developing regulatory frameworks to help simplify the legal position of cryptocurrencies and thereby provide regulatory guidelines for banks and other financial institutions to follow. These robustly designed frameworks help get rid of all concerns related to KYC and AML policies, thus providing enhanced transparency for both crypto traders and banks.

In 2013, the United States Financial Crimes Enforcement Network (FinCEN) issued guidelines on how digital currency traders and investors need to deal and comply with KYC and AML regulations. Similarly, in 2021, the Office of the Comptroller of the Currency issued guidelines granting permission to banks to use USDT Tether (Stablecoins) for making and receiving payments. Apart from partnering with regulators, some regular banks are setting new industry standards for trading with cryptocurrencies and crypto assets. This is one major integration trend and a step towards achieving a strong link or bond between the two parties. The World Economic Forum (WEC) also created a framework in 2018 for banks and regulators while assessing the risks associated with crypto.

FYI, education, knowledge, and collaboration are decisive in cutting the gap between traditional banking systems and cryptocurrencies. A partnership between mainstream financial institutions and cryptocurrency companies like “UniPayment” helps in nurturing better understanding and confidence between the industry verticals, leading to seamless integration. Better education and knowledge can help traditional banking companies understand the nitty-gritty involved in cryptocurrencies, enabling them to make more informed decisions about integration into their existing infrastructure.

Here, the role played by interoperability platforms and asset management enterprises is pivotal in overcoming complex challenges while integrating cryptocurrencies with conventional/regular banking systems. Such firms act as intermediaries between traditional banks dealing in fiat currencies and emerging crypto networks, thus enabling the smooth transfer of transactional data and funds. It provides an additional layer of generalization or abstraction that helps reduce the complexity involved in the integration process.

Final Note

As cryptocurrencies are fast becoming a trend among a new generation of investors, bankers, stock brokers, and forex traders, developing a sound ecosystem or infrastructure to support the necessary integration is imperative. It is achieved by simply leveraging the benefits of cryptocurrencies alongside maintaining the confidence levels and stability offered by traditional banking systems. Here, licensed asset managers can play a vital role in cutting short the gap between these two diverse yet interrelated worlds through smart licenses and technical expertise over blockchain technology.