As the trend toward digital currency continues, one of the largest industries dedicated to controlling the financial ecosystem could be in jeopardy. Cryptocurrency continues to make huge strides toward acceptance and adoption on national and global levels, which will undoubtedly impact the traditional banking sector. Jason Simon is an expert on FinTech and cryptocurrency matters and discusses how cryptocurrency is disrupting traditional banking solutions.

Fractional reserve banking is the premise upon which most banks have operated since first being introduced. They receive consumer money to hold, then provide loans against the holdings. In return, the banks are able to store less quantities of physical cash, while making money through interest payments, fees and other add-ons. It’s a system that has been in place since gold was the primary source of money and which is still the standard today.

However, banks are now not receiving the same attention they once did. Companies are now turning to alternative forms of lending and holding, including digital currency, which is reducing the holdings at traditional banks. Explains Simon, “For the past 60 years, even well before cryptocurrency was considered, fractional banking was losing ground to alternative lending methods. This has accelerated in recent years through digital currency, and traditional finance has now been relegated to a secondary role.”

A good example of an alternative source of payments is Alipay in China. It conducted $16 trillion in transactions last year by allowing consumers to store their money in the app, and then use it anywhere they want. Facebook and Amazon are considering similar moves, and the result will be continued less reliance on conventional banking to conduct day-to-day activity. However, the ultimate goal is to make it easier for consumers to interact with their money, something that banks historically have not been quick to address.

Banks haven’t been sitting idly as they lose ground in the financial ecosystem. Many are beginning to support the introduction of central bank digital currencies (CBDC), which would effectively allow a government-led monetary authority to create and oversee digital currency. “China is at the forefront of CDBC development,” explains Simon, “but other countries are taking notice, as well. Within ten years, over 30% of the world’s governments are likely to have a CDBC. Others, such as was recently seen in El Salvador, will simply establish Bitcoin and other digital currencies as legal tender, foregoing the government control.”