5 Reasons That Cryptocurrencies Frighten Institutional Businesses

The rise of Bitcoin and the current mania surrounding cryptocurrencies was not something that many people predicted. Those that got ahead of the game and invested early are now sitting on significant assets. But with prices still fluctuating wildly, it is a tricky market to assess with any degree of certainty.

Irrespective of the potential instability of cryptocurrencies, their impact is being felt throughout the world of finance and business. But what is it about them that is putting traditional organisations on the back foot? Here is a look at the disruptive power that they possess.

  1. They Leech From Established Reputations

This is the opinion of banker Agustin Carstens, who told the Financial Times that cryptocurrencies are putting existing institutions at risk by association.

His fear is that in the long term they will become inextricably intertwined with current systems of finance. This growth, fuelled by trust in the established infrastructure, will create a chokehold that could drag the sector into disarray if the cryptocurrency bubble bursts, he argues.

Some banks have been cautious to avoid tarnishing their brands through actively trading in this marketplace. But even their peripheral involvement will lead to an infection of the industry that needs regulation to contain, according to Carstens.

  1. They Are Untraceable 

Bitcoin and its brethren are a boon for people who want to carry out secure digital transactions without the risk of identity theft or exploitation. This also means that they are ideal for the purposes of money laundering, which makes banks and governments understandably nervous.

Cryptocurrencies can be used for everything from playing online casino games to buying products from e-commerce sites. But in the UK at least, their links to criminal cash cleansing practices are causing banks to give them the cold shoulder.

Recent attempts by Bitcoin investors to turn their crypto-generated profits into something a little less volatile have been thwarted. Banks have refused mortgages to people trying to pay the deposit in money that originated from the sale of cryptocurrencies.

Some investors have even claimed that lenders were in the dark about this market altogether, while others believe that they are actively hostile because of the implications for the world of finance.

  1. They Are Unregulated

This issue links in with both their security and their untraceable nature. And at the heart of all this is the blockchain; the indelible digital ledger that tracks all coins and transactions.

Bitcoin was founded on the principal of being a decentralised alternative to traditional currencies. It was this anarchic ethos that attracted early investors, but has perhaps got lost in the recent gold rush and rise to prominence in the mainstream.

Because cryptocurrencies are not regulated by any central bank or other institution, they are seen as inherently unstable and untrustworthy. And since the concept of currency has relied on nothing but trust for centuries, it is possible to see why some people are so concerned.

  1. They Are Creating A New Funding Model

For years most start-ups have relied on investors to provide capital to get them off the ground in return for a share of the business itself. But cryptocurrencies and the blockchain present fresh opportunities for fledgling organisations to get the cash they need to grow without founders having to give up any control to third parties.

Initial coin offerings (ICOs) are at the root of this. For committed supporters of crypto, they are the mould-breaking solution to many long standing problems with funding. For sceptics, they are the contemporary equivalent of a Ponzi scheme, designed to fleece investors and nothing more.

Selling tokens, or even just the opportunity to invest in tokens further down the line, means businesses working with blockchain technology can raise money without looking to established investment firms. Over $3.2 billion was generated in this way alone last year.

The divided opinions over ICOs are representative of the debate around cryptocurrencies as a whole. Ardent enthusiasts and vocal nay-sayers are plentiful, with neither group wanting to be on the wrong side of history when the dust settles.

  1. They Are Expensive To Integrate

Aside from the fears about money laundering and general disruption, one thing that banks and other businesses are dreading about the dawn of the cryptocurrency age is the cost of adapting to this brave new world.

A filing made by the Bank of America last month warned that it may have to dedicate significant resources to modifying its products so that they can be integrated with new technologies, including cryptocurrencies.

Large institutions are sometimes slow to adapt to technological changes. The shake-up in bricks and mortar retail caused by online shopping is still ongoing more than two decades after Amazon first launched its book selling site. Meanwhile platforms like Uber and AirBnB have swooped in to disrupt traditionally stable markets of their own. Cryptocurrencies are part of the same movement, but their scope for instigating seismic change remains difficult to calculate.