The Future of Banking

Welcoming you to the future of financial empowerment and innovation.

Today’s article reviews the evolution of centralized exchanges (CEXs) and the development of decentralized finance (DeFi), before discussing how these advancements will revolutionize financial services to enhance financial freedom, security, and ulimately, the future of banking.

The Evolution of Centralized Exchanges: From Wild West to Regulated Frontiers

Centralized exchanges (CEXs) are organizations that facilitate cryptocurrency trading on a large scale, using a similar business model to traditional asset (stock) exchanges.

In recent years, CEXs have transitioned from the unregulated fringes of finance to becoming more regulated entities, with the introduction of governmental regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) practices, playing an instrumental role in achieving this.

However, despite these advancements, there remains much to be done if they wish to emulate traditional financial institutions, with the risks of hacks, and collapse of well-known platforms such as FTX, highlighting the importance of security and regulatory compliance.

Indirect Engagement: Traditional Banking’s Entry into Cryptocurrency Markets

Classical state-recognized banking institutions have recently started to engage with the cryptocurrency market indirectly through Exchange-Traded Notes (ETNs) and Exchange-Traded Funds (ETFs).

These financial products, targeted at the business and investor sectors rather than retail consumers, do not offer direct buying and selling of cryptocurrencies. Instead, they provide financial instruments that mirror the value of cryptocurrencies, focusing primarily on leveraging the speculative aspects of these digital assets.

This approach allows investors to gain exposure to the cryptocurrency market within the regulated framework of traditional financial systems, without directly handling the cryptocurrencies themselves.

The Retail Shift: From Centralized Exchanges to the Promise of DeFi

Retail users commonly utilize centralized exchanges (CEXs) for purchasing and holding cryptocurrencies, despite being aware of the associated risks, including the potential for hacks, as seen with MtGox, and operational failures, similar to the collapse of FTX.

Although CEXs are increasingly regulated, they don’t offer the same level of security and trust as traditional banking institutions. This discrepancy has contributed to the rapid growth of decentralized finance (DeFi), driven in part by exchanges like BNB and Coinbase Wallet.

So, how does decentralized finance (DeFi) differ from centralized finance (CeFi)?

CeFi vs. DeFi

Individuals who hold assets on centralized exchanges (CEXs) receive little/no protection from their country’s legacy financial system, meaning if CEXs like FTX go under, your money goes with it.

DeFi offers a solution to this, giving individuals sovereignty of their assets and protecting them from 3rd party/custodial risk. This enhanced security, privacy, autonomy, and resistance to censorship embodies the ethical principle of self-sovereignty in finance, and highlights an important point.

‘Not your keys, not your crypto’

However, it also introduces a further layer of separation between blockchain-based transactions and the physical world.

Bridging Finance: The New Role of CEXs

Off-ramping is an essential component of the cryptocurrency landscape.

Despite the rapid expansion of DeFi, and development of off-ramps such as Kujira’s integration of Bidali into SONAR, it is still limited in its ability to provide effective off-ramping methods. This is where CEXs come in, facilitating the conversion of cryptocurrency to fiat currency and enabling the management of individuals’ portfolios in regard to taxation and fiscal management.

However, both DeFi and CeFi are imperfect, raising the following question.

How can digital currencies be integrated into everyday financial practices?

CEXs and Banks: Navigating the Future of Finance Together

Significant developments are taking place within the financial landscape, and this is expected to extend well into the near future.

Firstly, CEXs will continue to enhance their regulatory compliance across various jurisdictions, and in doing so, ensure the provision of consistent and efficient services to all users, a trend that is already observable.

Secondly, traditional banking institutions are expected to step up and start offering comprehensive services for cryptocurrencies, including both trading and custodial solutions.

Ultimately, it will be this progression that reflects a broader acceptance of cryptocurrencies, and results in the integration digital currencies within the traditional financial ecosystem.

An example of this is Hype, a revolutionary Italian banking company.

Banking Meets Bitcoin: Hype’s Innovative Approach

Hype, an Italian banking company, offers various accounts with both physical and virtual cards along with IBANs, enabling all standard bank operations, including tax compliance and generating necessary tax declaration documents in Italy.

Moreover, Hype facilitates the declaration of digital assets by providing the essential documentation needed for tax settlements, distinguishing itself from traditional banking institutions in embracing cryptocurrency functionality.

Another exciting development is Real-World Assets (RWAs), which represent a convergence of traditional banking and blockchain, and mark a pivotal moment for growth and innovation within the sector.

Real-World Assets (RWAs) in DeFi

The integration of Real-World Assets (RWAs) into DeFi allows for the tokenization and blockchain management of tangible assets, such as real estate, precious metals and commodities, opening up a whole new avenue for investment and liquidity.

Traditional banks, with their vast experience and regulatory frameworks, will play a crucial role in this. For instance, by facilitating the tokenization and collateralization of real estate properties, they could offer services to certify the value and legality of properties, making them suitable for use as collateral in DeFi platforms.

If successful, this collaboration will not only enhance the accessibility and efficiency of financial services, but also bridge the gap between traditional finance and the blockchain ecosystem, leading to a multitude of benefits for both parties.

Conclusion: The Future Outlook

As we look towards the future of banking within the dynamic landscape of DeFi and traditional banking sectors, we stand on the brink of a transformative era.

Technological innovations, particularly blockchain and artificial intelligence, are poised to redefine the essence of financial transactions and services. After all, the promise of DeFi lies in its potential to foster financial inclusion, reduce costs, and offer more personalized banking solutions.

However, this path is not without its challenges.

Regulatory frameworks, security concerns, and the imperative need for comprehensive digital finance education present significant hurdles, making it clear that the integration of conventional and innovative financial solutions will ultimately dictate the future of banking,

Thus, if synergy between traditional banking methodologies and the pioneering spirit of DeFi can be achieved, it will enable a more efficient, inclusive, and transparent financial ecosystem, offering unprecedented opportunities for growth and development and changing the cryptocurrency landscape forever.

Kujira Academy is a platform that aims to bridge the gap between young entrepreneurs and Web3, providing them with tangible education and career acceleration opportunities. Built by students, for students. Learn more about the academy and our vision here.

To register your interest and become a student of Kujira Academy, click here.

Written by Ale