Impact of Cryptocurrency on Banking - TOEFL iBT® Reading Practice Test

The TOEFL Reading section tests your ability to comprehend and analyze academic texts. In this passage, you'll dive into the topic of the 'Impact of Cryptocurrency on Banking.' You'll answer questions that evaluate your understanding of key concepts, main ideas, and details presented in the text.

This practice helps you sharpen your reading comprehension and prepares you to excel in the TOEFL Reading section.

Reading Instructions:

• You have 15 minutes to read the following passage and answer all 9 questions related to it.
• Most questions are worth 1 point, but the last question is worth more. The directions indicate how many points you will receive for that specific question.
• The specific section/paragraphs have been provided again with the question for ease of understanding and quick solution.
• Some questions include a word or phrase that is highlighted in the question as well as in the paragraph for quick reference.

Directions: Once you have read the passage, answer the following questions.

Paragraph 1

The rise of cryptocurrency has sparked a big change in the financial landscape, especially affecting the banking sector. Cryptocurrencies, such as Bitcoin and Ethereum, operate on distributed networks using a secure transaction system, which allows secure and transparent transactions without needing middlemen. This new idea challenges traditional banking practices by providing an alternative way to conduct financial transactions. So, banks are forced to rethink their roles, services, and the overall structure of the financial system. The effects of this shift are complex, influencing transaction costs, following rules, and the competitive environment of financial services.

Factual Information Questions

1. According to paragraph 1, what is one major effect of the rise of cryptocurrency on banks?
   
   
   1. It has eliminated the need for banks entirely.
      
      
   2. It has forced banks to rethink their roles and services.
      
      
   3. It has increased transaction costs for consumers.
      
      
   4. It has made traditional banking practices more popular.

Negative Factual Information Questions

1. The author mentions all of the following as effects of cryptocurrency on banking EXCEPT:
   
   
   1. Changes in transaction costs.
      
      
   2. Increased reliance on middlemen.
      
      
   3. Challenges in regulatory compliance.
      
      
   4. A shift in the competitive environment.

Paragraph 2

One important impact of cryptocurrency on banking is the potential reduction of transaction costs. Traditional banking systems often involve multiple middlemen, each charging fees for their services, which can add up, especially in international money transfers. For example, remittances processed through regular banks can have high fees, while cryptocurrencies enable peer-to-peer transactions that can avoid these middlemen, significantly lowering costs. A study by the World Bank suggested that money transfer costs could be cut by up to 70% when using cryptocurrencies. This cost-effectiveness could attract more consumers and businesses to use cryptocurrencies for their financial needs.

Inference Questions

1. What can be inferred from paragraph 2 about the potential impact of cryptocurrencies on consumer behaviour?
   
   
   1. 1. Consumers will likely prefer traditional banking methods.
         
         
      2. Consumers may be attracted to cryptocurrencies due to lower costs.
         
         
      3. Consumers are unaware of the existence of cryptocurrencies.
         
         
      4. Consumers will avoid using cryptocurrencies due to high fees.

Rhetorical Purpose Questions

1. Why does the author provide the example of the World Bank study in paragraph 2?
   
   
   1. To illustrate the complexity of cryptocurrency transactions.
      
      
   2. To highlight the potential cost savings associated with cryptocurrencies.
      
      
   3. To argue against the use of cryptocurrencies.
      
      
   4. To show that banks are losing money.

Paragraph 3 

But the rise of cryptocurrencies also brings challenges for banks, particularly regarding following rules and risk management. The distributed nature of cryptocurrencies makes supervision difficult, raising concerns about money laundering, fraud, and other illegal activities. So, regulatory bodies worldwide are struggling with how to create rules that can effectively govern the use of cryptocurrencies while still encouraging new ideas. For example, the Financial Action Task Force (FATF) has issued guidelines to ensure that cryptocurrency exchanges follow anti-money laundering regulations. Banks must adjust to these changing rules, which may require big investments in compliance technology and practices. This uncertainty can make banks hesitant to fully embrace cryptocurrencies as they navigate the difficulties of staying compliant while exploring new opportunities.

Vocabulary Questions

1. In paragraph 3, the word "supervision" is closest in meaning to:
   
   
   1. Control
      
      
   2. Observation
      
      
   3. Regulation
      
      
   4. Management

Sentence Simplification Questions

1. Which of the sentences below best expresses the essential information in the following text in paragraph 3?

   "The distributed nature of cryptocurrencies makes supervision difficult, raising concerns about money laundering, fraud, and other illegal activities."

   1. The distributed nature of cryptocurrencies complicates oversight and raises concerns about illegal activities.
      
      
   2. Cryptocurrencies are easy to supervise, which reduces concerns about fraud.
      
      
   3. Supervision of cryptocurrencies is straightforward and does not raise concerns.
      
      
   4. The nature of cryptocurrencies makes them immune to illegal activities.

Paragraph 4

Also, the rise of cryptocurrencies has pushed banks to improve their services. In response to the growing popularity of digital currencies, many banks are looking into developing their own digital currencies, often called Central Bank Digital Currencies (CBDCs). These digital currencies aim to combine the benefits of cryptocurrencieslike speed and effectivenesswith the stability and supervision of traditional banking systems. For instance, the People's Bank of China has been actively testing its digital yuan, which seeks to improve payment efficiency while maintaining state control over the currency. Similarly, the European Central Bank is exploring the potential for a digital euro. Such efforts show that banks are not just passive observers of the cryptocurrency trend but are really trying to integrate digital currencies into their services.

Insert Missing Sentence Question

1. In paragraph 4, there is a missing sentence. The paragraph is repeated below and shows four letters (A, B, C, and D) that indicate where the following sentence could be added.

"These initiatives reflect a proactive approach to the challenges posed by cryptocurrencies."

Where would the sentence best fit?

(A) Also, the rise of cryptocurrencies has pushed banks to improve their services. (B) In response to the growing popularity of digital currencies, many banks are looking into developing their own digital currencies, often called Central Bank Digital Currencies (CBDCs). (C) These digital currencies aim to combine the benefits of cryptocurrencieslike speed and effectivenesswith the stability and supervision of traditional banking systems. (D) For instance, the People's Bank of China has been actively testing its digital yuan, which seeks to improve payment efficiency while maintaining state control over the currency.

Prose Summary Questions

1. Directions: An introductory sentence for a brief summary of the passage is provided below. Complete the summary by selecting the THREE answer choices that express the most important ideas in the passage. Some sentences do not belong in the summary because they express ideas that are not presented in the passage or are minor ideas in the passage. This question is worth 2 points.

   The rise of cryptocurrency has significantly impacted the banking sector by:

   Answer Choices

   1. Reducing transaction costs and increasing efficiency in financial transactions.
      
      
   2. Forcing banks to completely abandon traditional banking practices.
      
      
   3. Encouraging banks to develop their own digital currencies to remain competitive.
      
      
   4. Creating a more dynamic financial environment driven by fintech competition.

Paragraph 5 

Also, the rise of cryptocurrencies has increased competition within the financial sector. Fintech companies, which often use secure transaction systems, are becoming strong competitors to traditional banks. These companies usually offer streamlined services that attract tech-savvy consumers, such as instant payments and easy-to-use interfaces. For example, companies like Revolut and TransferWise have gained popularity by providing low-cost international transfers and cryptocurrency trading options. So, banks are under pressure to improve their digital services and really enhance customer experiences to keep their clients. This competition could lead to a more dynamic financial environment, where innovation is driven by the need to adapt to changing consumer preferences and technological advancements.

Purpose of the Passage Questions

1. What is the main purpose of paragraph 5?
   
   
   1. To highlight the advantages of traditional banks over fintech companies.
      
      
   2. To illustrate how cryptocurrencies have increased competition in the financial sector.
      
      
   3. To argue that fintech companies will eventually replace traditional banks.
      
      
   4. To explain the history of fintech companies.

Paragraph 6

To sum up, the impact of cryptocurrency on banking is both profound and complex. While cryptocurrencies offer opportunities for cost reduction and innovation, they also bring challenges related to following rules and competition. As banks navigate this changing landscape, they must balance the need for compliance with the desire to innovate and stay competitive. The future of banking may depend on how well traditional institutions can incorporate the benefits of cryptocurrencies while addressing the associated risks. Finally, this ongoing transformation will shape the financial system for years to come, causing further exploration into the long-term effects of digital currencies on global banking practices. The broader effects of this shift may redefine the relationship between consumers and financial institutions, leading to a more inclusive and effective financial ecosystem.

Prose Summary Questions

1. Directions: An introductory sentence for a brief summary of the passage is provided below. Complete the summary by selecting the THREE answer choices that express the most important ideas in the passage. Some sentences do not belong in the summary because they express ideas that are not presented in the passage or are minor ideas in the passage. This question is worth 2 points.

   The impact of cryptocurrency on banking is significant because:

   Answer Choices

   1. It presents both opportunities and challenges for traditional banks.
      
      
   2. It has led to the complete elimination of traditional banking systems.
      
      
   3. It encourages innovation and the development of new financial products.
      
      
   4. It may redefine the relationship between consumers and financial institutions.

Answer Key with Explanation for TOEFL Reading Passage - Impact of Cryptocurrency on Banking

1. Answer: B

Explanation: The passage clearly states that the rise of cryptocurrency challenges traditional banking practices, compelling banks to reconsider their roles and services. This indicates a significant effect on how banks operate, making option B the correct choice.

2. Answer: B

Explanation: The passage discusses how cryptocurrencies reduce the need for middlemen in financial transactions, particularly in international money transfers. Therefore, option B, which suggests an increase in reliance on middlemen, is incorrect and is the right answer for this negative factual information question.

3. Answer: B

Explanation: The passage highlights that cryptocurrencies can significantly lower transaction costs, which suggests that consumers might prefer using them over traditional banking methods. This inference aligns with option B, making it the most logical choice.

4. Answer: B

Explanation: The author cites the World Bank study to demonstrate the significant reduction in transaction costs when using cryptocurrencies. This example serves to underscore the financial advantages of cryptocurrencies, making option B the correct answer.

5. Answer: C

Explanation: In the context of the passage, "supervision" refers to the oversight and control of cryptocurrency transactions, which aligns closely with the meaning of "regulation." Therefore, option C is the best choice.

6. Answer: A

Explanation: This option effectively captures the essence of the original sentence by summarising the challenges posed by the distributed nature of cryptocurrencies regarding oversight and illegal activities. It simplifies the information without losing its meaning.

7. Answer: B

Explanation: The missing sentence fits best after the mention of banks developing their own digital currencies, as it reflects the proactive approach banks are taking in response to the challenges posed by cryptocurrencies. This placement enhances the flow of ideas in the paragraph.

8. Answer Choices: A, C, D

Explanation: A highlights the cost reduction and efficiency benefits of cryptocurrencies.

C points out that banks are developing their own digital currencies to remain competitive.

D indicates the dynamic environment created by fintech competition.

Option B is incorrect as it suggests a complete abandonment of traditional practices, which is not supported by the passage.

9. Answer: B

Explanation: The main focus of paragraph 5 is on how cryptocurrencies and fintech companies are creating competitive pressure on traditional banks. This aligns with option B, making it the correct answer.

10. Answer Choices: A, C, D

Explanation: A captures the dual nature of opportunities and challenges presented by cryptocurrencies.

C reflects the encouragement of innovation and new financial products.

D indicates the potential redefinition of consumer-bank relationships.

Option B is incorrect as it suggests the complete elimination of traditional banking systems, which is not a claim made in the passage.

Practicing with topics like 'Impact of Cryptocurrency on Banking' will improve your reading comprehension and analytical skills. Mastering these abilities is essential for achieving success in the TOEFL Reading section.

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