Banks and other mainstream institutions can force major crypto exchanges like Binance to downsize if they dive into crypto. This is despite the scale of the current operation that Binance and Coinbase run which seems to be secure.
The rise of Bitcoin and cryptocurrency certainly elevated these institutions to where they are today. Needless to say, what has really kept them on top is the reluctance of mainstream institutions to enter crypto. With the consistency of blockchain innovations, and Bitcoin’s recent resurgence, this could very well change. This is because the industry has shown resilience and profitability which can be a new draw. As such, it is reasonable to begin to analyze the impact of the entrance of such players into the field. The impact on exchanges, in particular, can be a very interesting development.
Banks Competitive Advantage
Now, this may sound rather ridiculous, but banks can actually take out major exchanges through pricing. Yes, it is a fact that one of the reasons people trade in crypto for among other reasons, low transaction fees. The competitive advantage lies with the institutional power that banks have. Moreover, the banks are often on the positive side of the regulators in most jurisdictions. That said, this has to be a deliberate effort from their part.
A strategy of undercutting the exchanges in pricing is certainly one way to go about it. Banks can handle losses in exchange activities purely for the sake of expanding market share. Alternatively, large banks like JP Morgan could simply try to acquire such exchanges.
This bold move can be a signal to the markets that the banks truly mean business.Banks are always looking for maximum profitability and protecting their status as the most important brokers in finance. The rise of these exchanges could get to a position where it threatens such dominance. It goes without saying that bankers are some of the smartest strategic people out there. Such a move is therefore totally foreseeable.
Problems for Banks
The above scenarios are still only a possibility and not a probability. Such ideas may sound good on paper but the task of dominating crypto is uniquely difficult. The first is that cryptocurrency may have financial dimensions, but is an entirely different animal for the banks. Crypto users inherently distrust centralization. Even if banks were to try and compete with the exchanges on the basis of transaction fees, a whole lot of users will still prefer exchanges. The outcome will probably to force the exchanges to offer more competitive prices.
It is fair to compare the rise of crypto to companies like Tesla in the automobile market. These are companies that offer a unique product. To the company customers, they go there for a specific product. There may be other dominant companies in the sector but this does nothing to affect the specific market share.
Banks are always opportunistic and the idea of purchasing such exchanges has no doubt crossed the minds of some executives. However, what is the effect of an exchange announcing its acquisition by a major centralized bank? It is anyone’s guess, but it would not be a surprise if users flee the exchanges. That said, the banks can still offer better liquidity and leverage for customers. The banks can very well dominate the world of crypto in the long-term. Nonetheless, it will be no easy task by any measure.