What are Crypto Banks and Their Uses? A Detailed Guide

What are the purposes of cryptocurrency banks? A Comprehensive Guide

Key takeaways:

‍Bankers are widely regarded as some of the most uptight and conservative professionals around the world. They are also some of the highest-paid workers in the world; top bankers often earn multi-million dollar annual salaries, with a few even becoming billionaires. 

As the adage goes, if you can’t beat them, join them! To that end, many leading bankers have started exploring opportunities to enter the fast-growing cryptocurrency space. In this article, we explore what crypto banks are and why they matter in an increasingly digital age. We look at different examples of crypto banks, how they operate, and the various benefits they offer.

What is a Crypto Bank?

A crypto bank is a financial institution that stores, manages, and invests cryptocurrencies for its clients. Crypto banks seek to bridge the gap between the traditional banking system and the rapidly growing digital asset economy. Crypto banks will serve as a bridge, facilitating exchange between traditional banking systems and the world of cryptocurrencies. 

In other words, crypto banks are banking services for both cryptocurrency and fiat or only cryptocurrencies. They provide the same types of financial services as traditional banks: savings accounts, credit, investments, and so on.

How Will Crypto Banking Work?

Fundamentally, crypto banking will work in a similar way to traditional banking. Crypto customers will open an account and deposit their digital assets at the institution. The bank will then offer a range of services with that deposit. 

However, the underlying digital assets and blockchain technology will enable banks to make different decisions when managing accounts. When you deposit $500 in cash in your bank, the bank puts that cash in its vault and gives you a receipt. With digital assets, banks will have real-time access to account holders’ information.

Caveats: Reputational Risk and Consumer Confidence

A few issues will need to be dealt with before crypto banking can become a reality. Crypto banking will face regulatory issues that will need to be addressed before banks can start providing these services. There is also the issue of consumer confidence in online banking and the security of online transactions. 

The online banking industry has a history of fraud, fake identities, and other issues that give consumers little reason to trust a bank with their money. Successful programs currently being tested at leading banks may address some of these problems. Other issues, such as the potential for hacking, will need to be addressed before crypto banking becomes mainstream.

Will Consumers Adopt Fully Digital Banking?

One of the most significant issues facing crypto banking is that consumers may not want to switch to fully digital banking. The appeal of physical banks has always been the physical manifestation of wealth, savings, and assets. Consumers want to be able to see their wealth, not just track it in a digital account. Even with advances in digital banking, many consumers are reluctant to make the switch from a physical bank with a branch nearby to an online-only bank. As such, crypto banking may be more successful in appealing to younger generations that are more comfortable with online banking.

Crypto banks: The pros

Greater Transparency

One of the key attractions of the crypto market is greater transparency. Crypto banks will be able to operate in a completely transparent environment that will allow customers to view all assets, transactions, and account balances in real-time. 

Accessibility:

Another key advantage of crypto banking is its accessibility. With traditional banking, you often need to have a certain amount of money in your account to qualify for certain services. With crypto banking, anyone can open an account, deposit their cryptocurrencies, and take advantage of the same services as high-net-worth individuals.

Reduced Transaction Costs: 

Traditional banking is a very centralized system. This means that transaction costs are high and often need help to navigate. Crypto banking will be decentralized and significantly reduce transaction costs, enabling lower-income individuals to engage in efficient money management and investment. 

Savings on Travel and Other Expenses: 

With crypto banking, you can manage your account, manage your investments, and access other services from the comfort of your own home. This eliminates the need to travel to banks and reduces expenses for account management. 

Reduced Fraud: 

Another advantage of crypto banking is the reduction of fraud. With centralized systems, hackers can often breach and compromise a system. With a decentralized system, it is much more difficult to compromise the system and steal funds.

The cons

Lack of Trust: 

One of the biggest issues facing crypto banking is a lack of trust. Consumers have been burned by fraud and scams in the crypto market and have little to no recourse to recover funds. This has led to a lack of trust in the crypto banking system and will need to be addressed before crypto banking can take off. 

Inability to Access Physical Assets:

Another area for improvement with crypto banking is that it will be difficult to access physical assets. With traditional banking, you can redeem paper assets and access your savings. With crypto banking, you will not be able to access any physical assets and will have to sell your digital assets to access your savings. 

Lack of Physical Evidence of Wealth:

One of the biggest selling points of crypto banking is that it is digital, and you have access to your funds and accounts at all times. However, many consumers want physical evidence of their wealth and savings. They want to be able to go to the bank and physically see their savings in a vault. Crypto banking will take more work to reconcile with that desire.

Scalability:

Scalability is the biggest concern to be addressed; with only a few users, top blockchains need to be more scalable; we cannot compete with traditional banking if our transactional cost and time are high. Scalability has always been an issue for every newfound technology that is increasing in popularity; solving problems like the scalability trilemma is the first step to implementing real-world use cases for cryptocurrencies on a massive scale. 

Final words

Crypto banks will bring centralized banking to the decentralized world of digital assets. They will provide the same services as traditional banks: savings accounts, investment, and credit. However, they will do so using entirely different technology. Crypto banks will be fully transparent and accessible and save customers money on transaction costs. They will also allow for entirely digital account management. However, these banks will need to overcome a few hurdles before they can become a reality. The crypto market will need to overcome its reputation for scams and fraud. Consumers will need to be comfortable with fully digital banking and will need to trust the centralized system with their funds.