Crypto banks and emerging trends for 2022

Cryptocurrencies took the attention of investors and tech-savvy worldwide some time ago. Thanks to its rapid growth, the crypto industry has surpassed the $1 trillion market cap in 2021 and reached the all-time high of more than $3 trillion in the same year.

With regulations getting set in place, banks are getting more enthusiastic about including cryptocurrencies in their product offer.

Crypto Bank Services

Banks have been reluctant to include cryptocurrencies in their offer for years, but these days you can find a range of options available. The banking market has gone from blocking user transactions related to crypto to incorporating cryptocurrency exchanges, holding digital assets for their users, and more.

Cryptocurrency Exchanges vs. Banks

In the past, people interested in having cryptocurrencies could only purchase them on crypto exchanges or use computer hardware to mine them. As mining hardware presents a limitation for most, buying crypto with debit and credit cards was the only way unless your bank specifically blocked you from using them for crypto purchases.

Nowadays, most banks don’t ban such transactions, and many have even improved the integration process between supported exchanges and banking applications. Modern banks also include direct methods for purchasing major cryptocurrencies like Bitcoin and Ether. Fintech companies have also equipped banks to add cryptocurrency exchange features to their offers, although with a more limited selection of coins and tokens compared to dedicated exchanges.

Crypto-Backed Loans

The popularity of cryptocurrencies has prompted some banks to start issuing crypto-backed loans. Some top US banks, like Goldman Sachs, are considering Bitcoin-backed loans for institutions. These operate like any other type of loan, where the digital asset represents the collateral, as a car or house would be used in a car loan or mortgage.

With the crypto industry becoming worth trillions, it stands to reason that banks with other revenue sources and FDIC-insured deposits are open for crypto-backed loans. There are many advantages that this technology brings for banks. Since cryptocurrencies are operating globally, users can find lenders anywhere they are supported.

Crypto Savings

In the US, the national average interest rate for fiat currency savings accounts is at 0.06 percent. With BTC or ETH, you can get around a 10 percent savings rate at some financial institutions. These accounts are not FDIC-insured and should be viewed as investments rather than savings accounts. You will increase the amount of crypto you hold, and if you believe that it will keep its value or increase, it’s a great way of expanding your crypto portfolio.

Benefits of Cryptocurrency Transactions

Cryptocurrency transactions have low fees and are almost instant, no matter the intended recipient's location. The technology makes international money transfers much more affordable and straightforward.

The Office of the Comptroller of the Currency (OCC) has stated that public blockchains and stablecoins can help speed up transactions and payment processes. The technology has many advantages on clearinghouses for transaction processing.

Smart Contracts

Smart contracts are self-executing programs deployed on a public blockchain and could be used when two parties enter into an agreement. Banks could reinforce the trust as a third party that could provide smart contracts for loans, mortgages, lines of credit, and any other financial arrangement.

Banks and Hesitation for Cryptocurrency Adoption

Despite the clear advantages, there are multiple reasons why cryptocurrency users are hesitant to use the services of crypto banks and for banks to offer products associated with this technology.

Decentralization

Cryptocurrencies are designed to be decentralized and operate independently from a single financial structure. They were created as an alternative to the conventional banking system that led to the global financial crisis of 2007-2008.

The main advantage of cryptocurrencies is lost when they are used through traditional financial institutions, such as banks. That’s one of the reasons why banks aren’t confident about entering the market in a larger capacity. Furthermore, central banks see cryptocurrency as a disruptive influence on their ability to control the money supply.

Volatility

Unlike the stock market, cryptocurrency markets are constantly open and are thus even more volatile. This isn’t surprising as the market, despite 2021’s growth, can still fluctuate significantly if a particularly large investor leaves or a country like China bans the use of crypto.

However, there are some signs that the market is maturing. On January 20, the Russian central bank proposed a ban on mining and using cryptocurrencies on its territory. Like the Chinese ban, the institution cites threats to the state monetary policy, the wellbeing of citizens, and overall financial stability.

Such reports would usually cause FUD (fear, uncertainty, and doubt) similar to ones when the COVID-19 pandemic started. This time, it created a dip in the price of approximately 10 percent. It remains to be seen how the situation will develop until March 1 (the last day for market participants to comment on the Russian central bank report), but the effect on the crypto market has so far been much lower than expected.

KYC/AML Issues

Cryptocurrencies are either entirely or pseudo-anonymous. Peer-to-peer transactions are recorded on the public ledger, but they are not linked to an individual but rather to a public wallet address.

This presents an issue for banks under the wrong impression that such transactions would be complicated to regulate and track, especially since banks have to stay compliant with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.

Closing Thoughts

To keep up with the trends, banks have to adapt. This means embracing crypto technology and finding how to include it in their offer so users can get the best of both worlds: traditional and crypto banking.

Banks that are already implementing cryptocurrencies accommodate investors who aren’t as familiar with the technology and its fundamentals. They help their clients invest and secure digital assets by having custody over the crypto wallet, which adds another layer of security for people who are still getting to grips with how the crypto industry works.

Daniel Korolija is a content writer at CryptoBlokes.