ECONOMIC EFFECTS OF CRYPTOCURRENCY ADOPTION ON TRADITIONAL BANKING SYSTEMS

Abstract

The institutionalization of cryptocurrencies and blockchain-based decentralized finance (DeFi) that occurred within a short time, since the launch of Bitcoin in 2009, has significantly destabilized the banking systems of the past, replacing centralized intermediation and trust in the sovereign with the algorithmic and peer-to-peer trust models. This review combines the complex economic impacts of cryptocurrency use on traditional banks relying on empirical research, central bank discussions, and theories. The most notable effects are deposit disintermediation (stablecoins taking 5-15 percent of narrow money in high-adoption cases), lower demand of traditional payment services, net interest margins (NIMs) compression by 10-30 basis points in impacted segments, and credit disintermediation acceleration as DeFi lending protocols expand. In particular, stablecoins are threats to the transmission of monetary policy because they undermine the money multiplier, augment the volatility of velocity, and disrupt the ability to control the short-term rate of interest set by the central bank. The positive countervailing effects are seen because banks react by providing crypto custody services, blockchain pilots, tokenized deposits, and collaborating with DeFi platforms, which allow them to diversify their revenue and gain efficiencies. Nevertheless, regulatory fragmentation, AML/KYC compliance expenses, cybersecurity risks, and systemic risks in case of stablecoin runs or correlated crypto-bank failures are crucial issues. The discussion points to a two-way trend: in the short-term, the pressure of competition will be high, and in the long-term, the convergence will also occur, and traditional banks will either adapt to the use of DLT or will lose the market share gradually in payments, savings, and credit intermediation. Policy implications highlight the necessity of coordinated regulation, central bank digital currencies (CBDCs) as a competitive reaction, and macroprudential instruments to preserve financial stability in the context of a rapid increase in crypto adoption