What are Crypto Banks? Everything You Need to Know About

By Fire Labs Team | Jun 08, 2021

Cryptocurrencies have already become a part of our life. You have probably heard such words as bitcoin, blockchain, crypto, and others, haven't you? And if you are not an expert, you'll be surprised by the swift rise of cryptocurrency capitalization. In 2021, the ratio hits the 2 trillion cup and reaches Apple. 

Despite the willingness of Bitcoin to substitute traditional banks, in 2021, the task is not reached. Jeffrey Dorfman in Forbes and other experts even do not treat Bitcoin as a full-fledged currency. However, it prevents neither a rising number of cryptocurrency operations between customers and businesses (including such traditional and closed niches as real estate, insurance, and aviation) nor close connections between cryptos and arts. Cryptocurrencies have become so popular that people start connecting them with traditional banks reflexively.

The appearance of specialized structures working with cryptocurrencies like traditional banks work with fiducial (fiat, traditional, trustworthy) money was just a matter of time. We'll try to understand if they have already become a full substitution for traditional banks, along with their features and functions. In this article, you'll know everything about crypto banks, their future, and their perspectives.

global crypto market stats

Cryptobanks: Definition

Before we start, let's recall the main definitions that concern the topic. They'll help you to understand the situation if you are not an expert in crypto finances. If you are, it is still useful to recall the basics.

Coin terms

This list grows every day due to the appearance of new currencies. Here is what you need to know:

  • Cryptocurrency - it is an active digital asset and a currency at the same time. Its main features are: using cryptography for data encryption and using the dedicated register (blockchain) technology as a basis. 
  • Bitcoin - it is the first cryptocurrency ever made. It was invented by anonymous inventors in 2009 and now takes about 60% of the cryptocurrency market. 
  • Altcoin - this term implies any other cryptocurrency being an alternative to Bitcoin (Etherium, Namecoin, Dogecoin, etc.)
  • Stablecoin - this term is a common name for every cryptocurrency that is secured by fiducial money. In most cases, the exchange rate of such coins equals the value of a US dollar. 
  • Token - it is a digital asset created on a cryptocurrency blockchain basis. It can be tightened to any virtual object, proving its originality. 

Blockchain terms

Any cryptocurrency cannot exist without blockchain technology. Here are its main concepts:

  • Address - it is a set of symbols that defines the exact crypto wallet or smart contract. The address is needed for the transactions.
  • Block - it is a list of transactions that were created and confirmed by miners. Blocks appear in a certain period of time. For instance, a Bitcoin block appears every 10 minutes. Every block is attached to other blocks after appearance. That is how a blockchain forms. 
  • Blockchain - it is a dedicated register that consists of blocks with transaction lists. The blocks form a subsequence that cannot be changed or spoiled. Otherwise, the whole currency loses its data.
  • Miners are people who conduct block searches. In fact, they conduct transactions and get a reward in the form of cryptocurrency. 
  • Wallet - it is an application that lets you store cryptocurrency and conduct transactions with it. Wallets can be both digital and physical. One can use cloud services that protect currency with a password and login or a memory card that activates the wallet only when it is plugged into the device. 

blockchain terms

Crypto banking terms

Getting back to the issue of this post, we must admit that the majority of terms is similar to those used in traditional banking:

  • A crypto bank is a platform that conducts traditional banking operations (loaning, money preservation, transfers, exchanges, etc.) with cryptocurrencies.
  • A digital bank is a software or application that lets users commend their bank accounts via devices connected to the Internet. As a rule, this term implies operations with fiducial money. 
  • Decentralized Finance (DeFi) - it is a sphere of decentralized services (including platforms, stocks, and crypto banks) that conduct loaning and depositing on a blockchain basis. 
  • Custodial (depositary) - it is a feature of a financial structure that describes the ability of a structure to preserve and conduct operations with the client's financial assets.

The main problem with the crypto banks is their novelty. The definition covers too many concepts and still does not show the same features and options of traditional banking. However, we must check what we have got in 2021 and how crypto banks affect the situation with traditional banking. Do they compete or support each other?

Difference between traditional banks and crypto banks

Let's define the main differences between a traditional banking system and the crypto bank sphere. They have many of them, though there are many similarities as well. 

Legal base. It is, maybe, the biggest distinction between these two systems. While cryptocurrencies do well in regular spheres, the majority of countries still do not have any legislation concerning cryptocurrencies. Some of them even want to ban them. However, there are some exceptions: Switzerland has given a license to a crypto bank as well as the USA makes it legal on a federal level. 

As we know, traditional banking is tightly connected with the government, starting from a package of laws and finishing with an institution of the Central Bank. The legislation makes it both safer and more complicated: traditional banks are not as flexible and independent as crypto banks. On the other hand, they can protect the clients' assets better. Anyway, in some countries, people have access to foreign crypto services exceptionally.

fiat money ft bitcoin

The number of operations differs from bank to bank, but the traditional banks count more, as a rule. They can conduct any operation with client's money: depositing (with regular interest percent payments), loans (small, instant, big, mortgages, etc.), currency exchanges, gold and precious metal exchange, disposal of finances, international and inner money transactions, and many more operations and services.

Crypto banks can cover this list partially. In most cases, these are platforms for storing cryptocurrencies and their easy transactions. Many crypto banks stand as investment funds suggesting people invest in cryptos. Just a small number of cryptocurrency banks perform interest payments and loans. 

The next difference concerns safety and insurance. On the one hand, traditional banks are pretty safe: the assets are insured and have proficient security systems. Even if a physical bank is robbed, a client does not lose money owing to insurance and other bank offices of the current bank system.

If you are careful with your personal data and account, no one can steal your money, and when you lose a debit card, you can block it in seconds. In addition, all banks are insured, and the insurance companies have been working with them for decades. 

The situation with cryptocurrencies is slightly different. Even in 2021, the wallet protection is up to your choice. If you lose the information, it can be stolen. If you lose a physical wallet (a memory card), you risk losing your currency. If you are interested, read The New York Times article about Winklevoss twins struggling to protect their Bitcoins.

However, due to the stable blockchain of popular currencies, your currency cannot be stolen without a transaction. The biggest risk here is an investment in so-called sh*tcoins (special fake cryptocurrencies created for fraud). The situation with cryptocurrency asset insurance still develops. Companies that are ready to insure crypto assets appear, but they are still few in 2021. 

There is another factor that works against crypto banks. The human and knowledge resources are beyond comparison. While the traditional banking system has been developing for centuries, cryptocurrencies are a product of the last 13 years. There are naturally many more people who work for traditional banks. Crypto banks appear, but they lack specialists. However, we can witness traditional banks starting working with cryptocurrencies. Good financial analysts who work with cryptos start appearing as well. 

blockchain & banking

Can a traditional bank become a crypto bank?

A lot of banks still do not want to deal with cryptos due to a lack of legislation and investment risks. However, the exceptions exist: in 2019, JP Morgan became the first bank that ran its own cryptocurrency JPM Coin. The coin was aimed to make big transactions between corporations faster. 

Crypto vs. Traditional Banks: allies or competitors?

So, what are crypto banks? Are they going to be a full substitution for traditional banking? Let's recall the merits and demerits of both systems first.

Pros and cons of traditional banks

  • Legal basis;
  • A big number of p[ossible operations and flexibility in approach;
  • Both physical and digital appearances;
  • Experience and lots of specialists;
  • At the same time, legal basis and governmental connections make banks dependent on the government;
  • Bank transactions are pretty slow;
  • A bank is an additional mediator between people conducting a transaction;
  • Banks rule the money of a client. If a bank collapses, a person loses money. 

Pros and cons of crypto banks

  • Blockchain technology is pretty stable;
  • The safety measures are different but still high;
  • Blockchains are independent of a will of a single person;
  • Blockchain technology implies a minimal number of mediators;
  • Transactions within cryptocurrencies are swift and secure;
  • In most cases, crypto banks are investment funds: many governments still treat them as assets but not currencies;
  • Consequently, the legal basis for the crypto banks is more difficult to acquire;
  • The crypto banks do not have as many possibilities as traditional banks;
  • Few auxiliary services like insurance exist for blockchain. At least, there are a few companies that manage to combine all the services needed for the bank imitation.

In fact, the situation with the struggle between crypto banking and traditional banks is complicated. However, we cannot tell that crypto banks can become a full substitute for traditional banking. The relationship model as allies or systems that supplement each other seems to be more interesting. 

Blockchain technology is a stable technology that is used in many banking services (see the image below or read this post as an illustration). However, the biggest problem with the majority of cryptocurrencies is their insecurity by fiat currencies (not all cases) or physical assets. This problem can seem worthless for the experts and crypto investors, but it is clear for the regular people who are not familiar with the whole system. And, this uncertainty is another obstacle for crypto banks. 

how blockchain transforms banking

Another problem is the imperfection of the cryptocurrency transactions conducted during purchases. There are many examples of businesses accepting cryptocurrencies for goods and services. However, a company must pay salaries and taxes. For that, it must go to the cryptocurrency stock exchange, exchange the currency to fiat money and send them to the company's bank account. The conclusion - cryptocurrency banks will not be a full bank substitution unless the government starts accepting cryptos as taxes. 

The officials stay silent concerning the legal status of crypto banks. They dislike when the investors work aside from the taxation authorities in the intransparent systems. It sets a legal limit for the crypto banks' development. 

The final argument is the mutual uncertainty in cryptocurrencies. Any bank tries not to work with unstable assets. Unfortunately, Bitcoins and other currencies that are not supplied by fiat money stay uncertain for banks. The situation when a tweet of a single person drops the exchange rate of the biggest cryptocurrency does not work for the bright future of crypto banking. 

Conclusions

Crypto banks are the latest trend in the world of finances. Though they are not similar to traditional banks, they acquire new users every day. They can provide clients with simple options as loans and storage. 

However, we must assume that there is no competition between traditional and crypto banking models. The first one still prevails. And it will do so unless the people and governments start treating cryptocurrencies as a full-fledged substitution for money. 

Despite all the demerits of the crypto field in 2021, we stay optimistic: the rise of currencies is exceptional. It took them less than 15 years to turn from a niche concept into a world-famous happening. We predict that in ten or slightly more years, the situation will change: we'll witness the merging of two variants of banking, giving birth to a new financial environment comfortable for everyone.

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