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The cryptocurrency market has been going through significant changes in the last few years. Bitcoin, Ethereum, and other digital currencies are getting more public attention and the process of their adoption is intensifying. After going through a period of initial coin offerings (ICOs) in 2017, cryptocurrencies are now helping build decentralized finance or DeFi. We are also finally witnessing the rise of crypto banks.
The Crypto Market Today
Before exploring what crypto banking has to offer, it’s important to realize how much the cryptocurrency market has grown. At the time of writing this article, the market started another bull run, with BTC reaching another all-time high of more than $66,880 and a market cap of $1.19 trillion. The second-most-valued cryptocurrency project is Ethereum, and the price of ETH stands at around $4,140, with a total market cap of over $489 billion.
The total market cap of all cryptocurrencies is now over $2.6 trillion, making Bitcoin and Ether the most commonly used cryptocurrencies, besides a few other established coins at crypto-friendly banks.
In 2021, 13% of Americans bought or traded crypto in the past 12 months. In comparison, 24% of Americans invested in stocks over the same period.
Why the Traditional Banking System Is Flawed
Many people still remember and feel the financial consequences of the 2008 economic crisis. It was central authorities and, by extension, taxpayers who had to step in and bail out large banks after their careless and even malicious actions backfired.
Countries all over the world are known to mismanage their national currencies and economy, which often results in hyperinflation and the total collapse of a given currency’s value. Venezuela and Zimbabwe are just some of the most extreme examples, but developed countries are no strangers either to implementing policies that significantly impact their currencies.
Just a few short years separate the global economic crisis brought on by banks from crypto emerging as a potential solution to a broken system and getting recognition from both retail and institutional investors.
In 2008, Satoshi Nakamoto, the mysterious figure behind Bitcoin, published a whitepaper explaining how a decentralized peer-to-peer digital money would work. The idea didn’t gain recognition instantly, but nowadays, there are more than 10,000 other cryptocurrency projects. While their usefulness and importance vary significantly, these figures show that the interest in blockchain technology and the idea behind cryptos is growing.
For example, in 2021, Visa launched an Ethereum-network-powered program that allows for financial transactions to be completed with cryptocurrencies on Visa’s network—a powerful indicator that crypto banking is here to stay.
The Need for Crypto Banks and Their Benefits
According to a Cornerstone Advisors 2020 survey, the majority of the US residents who already own cryptocurrencies would like their current bank to provide them with the opportunity to invest in crypto directly.
Furthermore, having Bitcoin-based credit and debit card rewards is something that a large portion of the crypto community would be interested in.
What exactly does crypto banking need to offer its customers? Essential services such as those provided for fiat currencies—holding a balance, earning interest, and making payments—are must-haves. But cryptos also offer some unique possibilities fiat currencies can’t compete with. With blockchain technology and decentralized apps (dApps), the rise of crypto banks run by smart contracts is to be expected.
The technology allows users to borrow fiat money without having to go through a background check. Crypto serves as collateral, and to get it back, users have to pay back the amount with interest.
Borrowing and lending is just one fragment of the possibilities that banks supporting crypto and decentralized online platforms can provide; savings accounts and seamless payments with debit and credit cards are also some of the options.
Established Banks Incorporating Custodial Services For Cryptocurrencies
Banks with custody of crypto assets currently don’t offer their services to retail investors. However, to cater to interest from institutional investors, U.S. Bank has implemented custodial service for Bitcoin, Bitcoin Cash, and Litecoin. The bank plans to add support for Ethereum and other similar cryptocurrencies in the future.
U.S. Bank is not alone in announcing such service, as Bank of New York Mellon, Northern Trust, and State Street have also announced they would offer custody over crypto assets.
Cryptocurrency Exchanges
It stands to reason that cryptocurrency exchanges are best positioned to extend their services and contribute to the rise of crypto banks as they already have a large number of users on their platforms. There are more than 147 million active addresses on exchanges that hold BTC—that’s without counting thousands of other cryptocurrencies. The aforementioned U.S. Bank is the fifth-largest bank in the US and has 18.7 million customers. In comparison, Coinbase has more than 56 million verified users.
Obviously, large and well-known cryptocurrency exchanges have the significant advantage of being firmly established presences in the crypto market. Also, most of them have already built up high reserves of cash.
For banks to accept crypto, it’ll take time and legislative support. In the meantime, cryptocurrency exchanges are implementing user-friendly payment solutions. For example, Binance has recently implemented the Binance Card, a Visa debit card that allows you to make payments with crypto, with zero fees and cashback options.
Closing Thoughts
While we’re still far away from traditional banks operating with crypto in the same manner as with fiat currencies, there’s been significant headway in moving the financial industry in that direction. Allowing banks regulated by the Office of the Comptroller of the Currency to custody virtual assets in 2020 was an important first step for the market. This could open the door for more crypto-friendly banks in the USA.
As the financial and cryptocurrency sectors continue to evolve and develop, we’re confident we’ll witness significant changes within a decade. After all, Bitcoin going online in 2009 wasn’t so long ago, and nowadays, we have an emerging industry, financial system, payment solutions, and thousands of projects powered by blockchain technology.
Courtesy of https://cryptoblokes.com/blog/rise-of-crypto-banks/