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What are Crypto Banks? Everything You Need to Know About

23 Oct 2023 updated
11 min

Table of content

Cryptocurrencies have become a pervasive trend adopted by a wider population, not just tech-savvy crypto enthusiasts. According to recent statistics, more than 420 million people use cryptocurrencies worldwide, with the USA and Asian countries such as India and Vietnam being the most avid fans of this fintech innovation. For example, the number of confirmed Bitcoin daily transactions reached 249,000 by August 2022 (see figure below). Many sectors, from real estate to insurance, use crypto to ensure safe and efficient transactions. Blockchain development services, which allow taking advantage of numerous opportunities offered by cryptocurrencies, have become extremely popular in the business sector.

The cryptocurrency market has been growing exponentially. Revenue in this industry is projected to reach US$38 billion in 2023, while cryptocurrency capitalization exceeds $1.18 trillion, according to statistics published in Forbes. Popular cryptocurrencies such as Bitcoin and Ethereum have been incredibly stable this year despite unfavorable microeconomic conditions worldwide. So, the industry remains an appealing choice for those seeking to invest and earn some money.

The incredible growth of the cryptocurrency market goes hand-in-hand with the fast-paced banking sector digitalization. Morgan Stanley Research states that we are witnessing an “operational revolution” as traditional banks adopt advanced technologies such as blockchain, artificial intelligence (AI), and cloud computing. Crypto banks are a product of this modernization, which deserves close attention. In this comprehensive guide, I discuss crypto banks’ unique features and explain their role in building a modern state-of-the-art banking system.

Cryptobanks: Definition

Crypto bank is a financial organization offering the same financial services as traditional banks (e.g., loans) but using cryptocurrency rather than traditional currency such as dollars. Crypto banks take the best from the functionality of digital banks and cryptocurrencies to make transactions quicker, safer, and more convenient. 

Crypto banks come in different variations, from traditional banks with crypto licenses to digital asset platforms with crypto bank functionality. Read on to learn more about the types and functions of these unique financial institutions. But first, let’s go through the most common terms you may find confusing.

Difference between Crypto Banks and Digital banks

Discover the future of banking with Helen Petrashchuk from 4IRE in ‘Crypto bank vs. Digital bank,’ a video that contrasts these two modern financial models, shedding light on their roles in today’s evolving economic landscape

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.

Read Also: How to Build a Stablecoin on Ethereum

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. 

 

Crypto banking terms

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

  • crypto bank is a platform that conducts traditional banking operations (loaning, money preservation, transfers, exchanges, etc.) with cryptocurrencies.
  • 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 related to defi development (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. They develop very quickly following different patterns and business models, so it may be hard to understand what crypto bank suits your personal and business needs. So, let’s go deeper into the types of crypto banks. 

Read also: Initial dex offering platforms

The Evolution of Banking and the Emergence of Crypto Banks

4IRE team has conducted an in-depth analysis of the market and found at least 25,000 banks currently operating worldwide. Although traditional banks are still more popular, a growing proportion of the banks are more tech-focused crypto banking institutions. These have developed as a response to an increasing digitalization of the whole business sphere and high demand for convenient online banking services. Traditional brick-and-mortar banks have begun incorporating digital functions to improve access to services, which resulted in the emergence of online and mobile banking, commonly united under the umbrella term of ‘digital banking.’ Recently, crypto banks have joined the quest for a new-level digitalization by offering cryptocurrency transactions.

My research has revealed that there are several types of crypto banks currently operating in the financial sphere:

  • Traditional banks with crypto licenses
  • Digital banks with crypto licenses (e.g., Robinhood Crypto, Revolut, etc.)
  • Crypto banks with digital bank functionality
  • Digital asset platforms with crypto bank functionality 

The banking sphere evolves very quickly and becomes less centralized and rigid. With so many new forms of fintech services raising the competition to a new level, traditional banks will inevitably have to innovate and seek more flexible, creative, and user-friendly solutions. 

The phenomenon of fintech superapps vividly illustrates this point. These banking platforms provide a wide selection of services unrelated to finance. For example, you can pay taxes, utility bills, purchase insurance, etc. By integrating these services into one convenient app, fintech companies provide a smooth user experience that traditional banks can no longer match. So, I expect further development in this sphere, making all finance-related activities even more convenient.

Traditional banking is tightly connected with the government, starting with 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. However, they can protect the clients’ assets better. Anyway, in some countries, people have access to foreign crypto services exceptionally.

The number of operations differs from bank to bank, but the traditional banks count more, as a rule (see figure below). 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, 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 the 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, I witness traditional banks working with cryptocurrencies. Good financial analysts who work with cryptos start appearing as well. 

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, some 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. 

In 2023, an increasing number of traditional and digital banks integrate crypto functionality. It can be achieved through the three types of licensing:

  • Licensed Digital Bank
  • Digital Unit of Existing Licensed Bank
  • Partnership with Licensed Bank

The flexibility of options means more and more financial institutions will be tempted to consider incorporating cryptocurrencies. 

Crypto vs. Traditional Banks: allies or competitors?

Crypto and traditional banks have strengths and weaknesses, which deserve a closer look.

Traditional banksCrypto banks


Pros

  • Legal basis

  • A wide selection of possible operations, including checking accounts, credit cards, loans, investments, financial advice, and more

  • Both physical and digital services available

  • Experience and lots of specialists

  • Easy to understand for people with limited IT skills


  • Blockchain technology is very secure

  • Lower transaction costs and faster settlement times increase convenience

  • Services are globally accessible and allow for instant transfers without geographical restrictions

  • Blockchains are independent of a will of a single person

  • Blockchain technology implies a minimal number of mediators (see figure below)

  • Transactions within cryptocurrencies are swift and secure



Cons

  • 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

  • If a bank collapses, a person loses money


  • Price volatility increases investment risks

  • The legal basis for the crypto banks is still inadequate in many countries

  • The lack of clear regulations and consumer protection creates risks

  • The crypto banks do not have as many possibilities as traditional banks

  • Few auxiliary services like insurance exist for blockchain

Both banking types have their strengths and weaknesses to work on. For example, traditional banks need to focus on addressing the following issues to compete with crypto businesses:

  • Navigating Regulatory Compliance: Traditional banks and startups struggle navigating the complex legal framework regulating digital banking and cryptocurrencies.
  • Technological Challenges: Transitioning to a digital platform or incorporating a cryptocurrency requires a supplicated technological infrastructure. Creating it can be daunting for organizations without the necessary human and technological resources.

Market Understanding: The volatility and complexity of the cryptocurrency market may confuse and discourage potential investors and prevent them from making informed decisions.

As for the crypto banks, their major problem is the volatility and uncertainty of cryptocurrencies. No bank likes to work with unstable assets. Unfortunately, Bitcoins and other currencies that are not supplied by fiat money are perceived as uncertain by 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. 

 

The imperfection of the cryptocurrency transactions conducted during purchases is also a significant problem. 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 are not willing to provide the legal status to crypto banks. They dislike when the investors work aside from the taxation authorities in a non-transparent system. It sets a legal limit for the crypto banks’ development. 

Thus, it’s doubtful that crypto banks can become a full substitute for traditional banking. Given the stated limitations, it would be fair to perceive traditional and crypto banks as allies or systems that supplement each other. They outbalance each other’s weaknesses, providing users with a wider variety of banking services.

Trends and Predictions 

The development of the crypto market is exciting to follow because there are many changes happening very quickly. As shown in the figure below, blockchain and cryptocurrencies will also positively transform the banking sector.

Based on my research, I predict the following transformations in the nearest future:

  • An increasing number of crypto banks and growing competition
  • Increasing legal regulation of crypto banks
  • Further integrating blockchain technology and cryptocurrencies in traditional banking
  • Developing security standards to protect crypto assets
  • Increasing popularity of stablecoins and other low-volatility cryptocurrencies 
  • Improving user experience for more convenient crypto banking 
  • Implementing smart contracts for bank operations automatization 
  • The increasing partnership between traditional and crypto banks 
  • Developing solutions for risk minimization and assessment of credit scoring in crypto banking
  • Increasing investment in cryptocurrency and crypto banking startups

Thus, the future of crypto banking is bright, so it’s perfect timing to consider investing in this booming sector. 

Crypto Banking Solutions 

4IRE team of industry-leading experts from the Banking and FinTech sectors offers a wide selection of crypto banking solutions, such as crypto banking software and cryptocurrency development. We understand the importance of embarking on a crypto trend, so we take pride in offering our clients well-designed solutions specifically tailored to meet their unique needs.

Here’s why you should consider using our services if you are planning to enter the crypto business:

Banking and Fintech Expertise

Our certified professionals with a proven track record know the ins and outs of the industry, so they can develop products that hit the mark. Advanced training allows them to provide expert advice on anything concerning blockchain and cryptocurrencies. From business strategy development to legal consultation – you can rely on us when making the most important decisions. 

Security and Compliance

We ensure that the products we deliver adhere to all laws and regulations. Our mission is to design fintech solutions that create a secure, accessible, and reliable environment for seamless cryptocurrency transactions. 

Customization and Flexibility 

Our evidence-based products can be tailored to any business needs. It’s up to you to determine commissions, manage fees, implement tiered access control, etc. Moreover, the modular design allows upgrading your banking services for stable and continual improvement, which is crucial in this competitive business.

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 and will definitely gain even greater popularity in the near future. Crypto banks can provide clients with diverse, accessible, and fast services such as loans and asset storage. Based on my experience, I can confidently say that there is no competition between traditional and crypto banking models because they complement each other, outbalancing each other’s limitations. 

The 2023 statistics on the state of the crypto market allow me to stay optimistic regarding the future of this industry. The rise of currencies is exceptional because it took them less than 15 years to turn from a niche concept into a world-famous phenomenon. Leveraging deep blockchain and defi development experience, I 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. 

FAQ

What are crypto banks?

Crypto banks are financial organizations offering the same financial services as traditional banks but using cryptocurrencies. Crypto banks use a mix of digital and crypto bank functionality.

How do crypto banks differ from traditional banks?

Traditional banks act as intermediaries between the sender and receiver. Crypto banks are based on a decentralized network, meaning that they process cryptocurrency transactions directly between the sender and receiver.

What services do crypto banks offer?

Crypto banks offer a variety of services, such as the buying/selling of digital assets, access to cryptocurrency exchange platforms, and functionalities of digital banking.

What challenges of traditional banks can crypto banks address?

Crypto banks have no geographic limitations and can be accessed from any part of the world. They provide secure, fast, and reliable services without unnecessary mediators. 

Can I integrate crypto bank features into the existing banking infrastructure?

For sure! Traditional banking infrastructures can flexibly incorporate crypto bank features to bring greater efficiency. This can be achieved by integrating blockchain technology to make payments faster and more secure.

Can I develop my own crypto-banking solution?

Yes. 4IRE team knows proven methods of developing competitive and smooth crypto banking solutions. You can consult our renowned experts to learn how to design a solution compliant with regulations and meeting the highest industry requirements.

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