Since the first digital currency launch in 2008, there has been a massive surge in the adoption and use of cryptocurrencies worldwide. The crypto industry has grown significantly within ten years and now enjoys patronage from over 300 million people worldwide. As with other new and upcoming sectors, the crypto landscape offers several opportunities for its adopters to invest and grow wealth.
At its core, blockchain technology and cryptocurrencies were built to replace traditional financial institutions like banks by giving users direct control over their financial wellbeing. It was also designed to overcome barriers put in place by financial regulators to monitor and control traditional financial systems.
Bitcoin is making waves in the banking industry
In theory, that idea sounds very noble due to the overbearing nature of most financial institutions and financial policies enacted by governments and their agencies. However, when considered practically, the likelihood of a total overhaul of the current economic structure seems very unlikely in the short term.
As a result of this factor, many centralized exchanges operate and function under the laws and policies of governmental agencies in their different locations. In principle, these policies are similar to policies in place for guiding traditional banking institutions. However, we must clearly state that crypto exchanges do not serve as crypto banks.
Although these centralized crypto exchanges serve as a means for purchasing, storing, and selling digital assets, they can not be classified as Crypto Banks or Crypto Banking Institutions. They simply function as marketplaces for crypto transactions. As a result, there is a need to develop and launch financial institutions that will serve as crypto banks.
Much like traditional banks, Crypto Banks should offer their users banking services based primarily on cryptocurrencies. Additionally, these banks will provide their customers with access to a wide range of crypto products and services.
When considered critically, the concept of a bank exclusively for crypto assets may raise concerns over decentralization. It may also lead users to wonder: what does a crypto bank look like? How will Defi and Smart contracts work in a crypto bank? How will loans be delivered in a crypto bank? This article will discuss how to operate a crypto banking institution. We will also consider financial services available in the Defi space and how many of these can be incorporated into the crypto banking sector. However, before we define some of the features that ought to be a part of any crypto bank, let us briefly define crypto banking.
A crypto bank is a financial institution that offers a range of traditional banking services like deposits and withdrawals, savings, lending, and borrowing. However, instead of using fiat currencies, a crypto bank performs most of its functions using digital assets. Additionally, crypto banks offer their investors access to a wide range of crypto-based markets and instruments.
Although most of these functions can be attributed to standard banks, they don’t offer financial services based on cryptocurrencies. It is important to note that crypto banks must comply with governmental regulations and adhere to financial regulators’ rules to be legal. It is important to note that a crypto bank is very different from a crypto-friendly bank. Unlike a crypto-friendly bank, a crypto bank operates using digital assets for most of its operations.
A fully functional crypto bank solves several critical problems associated with blockchain-based crypto platforms. For example, these banks are certified and operate under the laws of regulatory authorities. Similarly, they offer users banking services like deposits and withdrawals, savings, lending, and access to numerous crypto-based marketing tools.
Some crypto platforms offer certain services to users. These include crypto checking accounts, crypto interest accounts, money transfer services, and lending services. These services can be classified under crypto banking activities. As a result, crypto banks should offer all of these services to their users. Let us briefly consider each of these services.
Crypto checking accounts are similar to a traditional bank account. These accounts allow users to store their digital assets free of charge. Users of crypto banks should have access to crypto checking accounts for storing their digital assets. Vast and Quontic are digital banks that currently offer these types of accounts.
A crypto interest account can be considered as the equivalent of a regular savings account. These types of accounts have much higher interest rates than traditional savings accounts, usually between 7% and 10%. Usually, crypto interest accounts are available of crypto exchanges like Gemini, BlockFi, Nexo, Linus, to name a few. This type of crypto service must be available in the portfolio of any standard crypto bank.
Like most banking institutions, some crypto platforms also offer multicurrency accounts to their users. However, these crypto platforms offer access to a wide variety of crypto assets that open multicurrency bank accounts. For example, Wirex provides multicurrency accounts and cards for cryptocurrencies and fiat currencies. Crypto Banks looking to offer this service can accomplish that by partnering with established payment platforms like Visa and Mastercard to ensure seamless exchange of digital assets for fiat currencies.
In addition to offering its users different types of crypto accounts, crypto banks must also offer money transfer services and deliver a cryptocurrency payment gateway to their users.
Although crypto users can send their digital assets independently to other traders, having a reliable crypto bank can help safeguard the process and ensure maximum protection for crypto traders.
Adding these services to the portfolio of crypto banks will eliminate any uncertainty or reservations that traders might have regarding cryptocurrency. Furthermore, the users will have more payment options available to them.
Another essential feature that must be available in the portfolio of a crypto bank in crypto loans. However, this may prove to be a challenge due to the volatile nature of crypto assets. Crypto banks can imitate the structure employed by different lending services built of decentralized finance to deliver excellent lending services.
Some of the best Defi lending platforms include Aave, Mango, MakerDAO, Compound, and PhoenixDAO. By copying the example of these lending platforms, crypto banks can develop lending systems that allow their users to participate as depositors or borrowers.
Using this system, depositors provide liquidity by depositing their funds in exchange for earning rewards. Similarly, borrowers must deposit collateral before their loan requests are granted.
Crypto banks can arrange for collateral and deposits to be made using stable coins to prevent the loss of funds due to volatility. Similarly, these banks can partner with other Defi protocols to deliver the best lending services to their users.
It is important to note that, unlike traditional banks, crypto banks must build their lending services on smart contracts to ensure fairness to likely lenders. Additionally, these loans must be accessible to all users.
The idea behind the development of crypto banks is very noble. However, there are still questions over the feasibility of this concept when viewed based on the principles of decentralization.
There is no doubt that some decentralized services in a crypto bank can be based on the principles of decentralized finance. For example, crypto lending services could be built in these institutions as copies of various Defi lending protocols. However, at its core, crypto banks will function as a centralized platform similar to the operations of a traditional bank.
As a result of its centralization, most crypto banks will face problems and concerns that are currently attributed to traditional banks. For example, users of these banks may have concerns over hacks or attacks on their money.
Additionally, there will be concern over the impact of a banking collapse on users of crypto banks. Finally, crypto banking will remove the possibility of anonymity from crypto transactions, a feature currently guaranteed by many Defi protocols. These issues will be a significant barrier in adopting and using crypto banks by crypto traders looking for anonymity and decentralization.
Having banks dedicated to offering crypto-based services to their users will result in several benefits. Such banks will provide perks like a smooth user experience, more accessible partnerships with established financial platforms, and different financial options under one platform.
When all these elements are in place, clients can expect to receive quality service when they take advantage of any of the services offered by their chosen bank. Although not yet available, we expect to see the launch of a crypto bank that delivers a comprehensive crypto portfolio to users in the future.