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How Crypto Banking is Taking Shape Over Traditional Banking

When Satoshi Nakamoto authored the Bitcoin whitepaper in 2008, no one believed that what was conceived as an idea would develop into one of the biggest technological innovations ever. Not just that – it inspired the new digital money movement. Today, over 580 million people globally transact in cryptocurrencies, such as Bitcoin (BTC), Ether (ETH), Solana (SOL), etc., causing a major disruption in global commerce. 

Banking has been fundamental to the global economy for years. From the Medici banking houses of the Renaissance era to today’s financial institutions like JPMorgan Chase, banks have always been for storing, transferring, and safeguarding wealth, until cryptocurrencies came, which changed the dynamics.

The emergence of Bitcoin and other cryptocurrencies gave rise to Decentralized Finance (DeFi). DeFi introduced a model of how money is used and managed without relying on traditional institutions. The term given to this model is called crypto banking. 

This mechanism is disrupting traditional finance (TradFi), as the crypto ecosystem operates 24/7, worldwide and functions without the need for banks. It also settles payments instantly and provides higher yields than savings accounts. The DeFi model has revolutionized banking and is now poised to take over traditional banking. This blog explains how crypto banking is taking shape over traditional banking.

What is Crypto Banking?

Crypto banking refers to financial services that rely on blockchain, smart contracts, and digital currencies. This term defines any financial service conducted on blockchain, rather than banks. Crypto banking is fully decentralized, unlike traditional banking, which has a central authority. 

Services offered in crypto banking aren’t explicitly different from their traditional counterparts. However, crypto banking deploys a model that caters to more people than traditional banking does. In simplified terms, crypto banking fosters financial inclusion. Services offered include:

  • Savings: Users earn higher interest on their crypto savings via DeFi lending or borrowing platforms. 
  • Lending and Borrowing: Users can obtain collateralized loans with digital assets.
  • Transfers: Crypto banking allows peer-to-peer transfers with minimal fees. 
  • Staking: You can lock up your tokens in Proof-of-Stake platforms for a fixed period to gain rewards. 
  • Custody: Crypto banks can securely store your digital assets.  

Types of Crypto Banks

Crypto banks are decentralized institutions that facilitate crypto services, including trading, custody, savings, and lending. Common types of crypto banks include fully decentralized, centralized crypto banks, neobanks, and custodial banks.

Fully Decentralized Banks

Fully decentralized banks are run like a governance organization. This type of bank provides services without a central entity. Operations are conducted via smart contracts and community voting, hence the governance. They handle peer-to-peer lending and borrowing, as well as staking. Common examples include MakerDAO, Compound, and Aave. Both are decentralized lending protocols.  

Centralized Crypto Banks

Centralized crypto banks are fully crypto-native financial institutions built wholly on digital currencies, including stablecoins and tokenized assets. Think of crypto-native banks as their traditional counterparts. The only difference is that the latter are built on fiat and the former on cryptocurrencies. The function of centralized banks is to accept crypto deposits, offer crypto-denominated loans, and provide DeFi services, including staking and yield farming. Examples of this type of crypto bank are AMINA Bank (formerly SEBA Bank) and Sygnum Bank. Both are regulated and licensed and situated in Switzerland. 

Neobanks

Neobanks are financial institutions that combine traditional banking with Blockchain. Think of them as hybrid banks that offer both fiat and crypto services in a single banking interface. They bridge the gap between fiat and crypto, allowing users to access both currency types on a one-stop financial platform. Some of the functions include trading and holding cryptocurrencies and fiat, issuing crypto-linked debit cards, and facilitating conversions between fiat and digital assets. Notable examples include Revolut and Wirex.

Custodial Banks

Custodial crypto banks aren’t like other crypto banks, as they don’t engage in trading or DeFi services. They provide custodial services, holding customers’ digital assets on their behalf, just like traditional banks hold fiat deposits. Sometimes, banks entrust custodial services to these types of banks because they have the infrastructure to secure assets. Apart from safekeeping, custodial banks offer insurance for stored crypto in case of theft or hacking. They also provide APIs and interfaces for businesses to manage their crypto holdings. Typical examples include Anchorage Digital and Coinbase.  

Key Differences Between Crypto Banking and Traditional Banking

Crypto banking shares some similarities and many differences with its traditional counterparts. Below are the key differences between the types of banking. 

Feature

Traditional Banking

Crypto Banking

Custody

Bank holds your funds and doesn’t entrust storage or custody to other entities. Crypto banks promote self-custody or take the burden off traditional financial institutions by providing a third-party service. 

Accessibility

Banks work for limited hours, and access to their services differs from region to region.  Transact cryptocurrency 24/7 without borders. There are no breaks or holidays with crypto banking. 

Speed

Transactions take between 1-3 business days for international transfers due to various rules of payment gateways for regions. Transactions are near-instant, regardless of distance or location. 

Transparency

Traditional banking systems operate a closed, opaque system where only the bank has full visibility into every transaction and money movement. Crypto banking is built on Blockchain, where transactions are recorded on a public ledger and can be accessed by everyone. The on-chain visibility is proof of the blockchain’s transparent nature.

Intermediaries

Transactions here are facilitated through multiple middlemen, such as banks, payment gateways, clearing houses, and the central bank. This slows down transaction finality and increases costs. Transactions are based on peer-to-peer models, where the middleman’s role is replaced by a consensus mechanism. This makes transfers faster and more affordable. 

Crypto banking is based on a trustless system, where the system enforces the rules through smart contracts and consensus mechanisms. As a result, transactions are near-instant and cheaper compared to their traditional counterparts. Traditional banks rely on rules and regulations from the central bank to keep funds safe. 

How Crypto Banking is Gaining Traction

Crypto banking is encroaching mainstream finance, and that’s not surprising, given the benefits it offers. What was once called experimental is capturing global attention from users, institutions, and regulatory agencies. The rise of this new model of digital banking is catalyzed by three main factors: global adoption trends, regulations, and innovations. 

Global Adoption Trends

Crypto banking’s rise is orchestrated by the increasing global cryptocurrency adoption. As mentioned, over 580 million people globally use cryptocurrencies. According to a survey, 33.7 million Americans own digital currencies, representing about 17% of the global crypto population. This number is behind countries like India, Nigeria, and Vietnam, which have 29%, 27%, and 25% adoption rates. These individuals don’t just own – they seek banking services, such as savings and lending, where they can put their portfolio into use. 

Emerging markets like Nigeria and Vietnam have seen a surge in cryptocurrency use due to inflation, unstable fiat currencies, and high remittance demands. Also, hedge funds, asset managers, and public companies are establishing and expanding their crypto portfolios, fuelling institutional adoption. For instance, BNB Network Company recently announced the purchase of 200K BNB for $160 million through a $500M private funding. Windtree Therapeutics has also planned to raise $500M to build a BNB Treasury. Furthermore, GameSquare is on the verge of setting up an Ethereum treasury. These firms are aggressively acquiring cryptocurrencies to maintain a robust portfolio and hedge against inflation. Institutional adoption has paved the way for crypto banks to offer secure DeFi services, such as custody. 

As mentioned, remittance demands are fuelling the shift to crypto banking. Traditional banking makes cross-border transfers slow and expensive. Crypto banks fill this gap by providing low-cost, fast, and transparent payment services. Therefore, users aren’t only investing in crypto but also for access to a full suite of services, just like traditional banking. This is a major driver for the growth of crypto banking.  

Regulatory Shifts

Regulations have been a significant hindrance to crypto adoption, most especially in crypto banking. Regulators have cited volatility and crime as some of the major reasons for the strict oversight. However, the landscape is changing, thanks to evolving perspectives of some government officials and leaders, such as Donald Trump and Lee Jae Myung. Governments are shying away from blanket bans to developing a flexible legal framework that allows the operation of crypto banks under oversight.

Switzerland, Singapore, and Hong Kong, as well as regional bodies like the European Union, have created regulations for the licensing and supervision of digital assets. EU’s MiCA is a comprehensive framework that sets the standards for how oversight should be. Such regulations build user confidence and trust.

Stablecoins serve as the main medium of transaction for many crypto banking services due to their stability. Countries are introducing clearer laws to dictate issuance, custody, and trading. For example, the United States’ GENIUS Act oversees stablecoin use, issuance, trading, and reporting. These guidelines ensure these dollar-pegged assets are fully backed and audited for consumers’ safety. 

Although each country has its own approach to regulations, the overall shift is embracing adoption and innovation while safeguarding investors. Countries have acknowledged the potential of crypto. Instead of prohibition, they are establishing clearer rules and guidance to safeguard the space.  

Technological Innovations

Innovation is the backbone of cryptocurrency banking. Without Blockchain and DeFi protocols, crypto banks wouldn’t operate and compete with traditional banks. The rise of crypto banks has also stirred up competition between DeFi protocols, as they upgrade their platforms to aid crypto banking services. They integrate cross-chain capabilities to help crypto banks offer seamless services across multiple chains, aiding flexibility. 

Crypto banks are leveraging DeFi protocols to offer yield-bearing services and decentralized lending. They are also using many scaling solutions to minimize transaction costs and make crypto use more practical. The growth in crypto banking has seen a dramatic increase in institutional-grade custody solutions, such as multi-signature wallets, to make storing crypto safer. These innovations are creating an ecosystem for crypto banks to thrive.  

Advantages of Crypto Banking Over Traditional Banking

The benefits of crypto banking over its traditional counterparts are glaring. While traditional banks dominate, crypto banking is rising through the ranks as a unique alternative to the limited legacy financial system. Below are the advantages of crypto banking over traditional banking. 

Financial inclusion: Banking the unbanked

Fostering financial inclusion is one of the biggest promises of cryptocurrencies, and crypto banking is ensuring that’s the case. The World Bank reveals that more than 1.4 billion adults globally have no financial account due to limited access to physical bank infrastructure. high service fees and documentation needs. That’s not all; traditional banks overlook the rural communities and low-income earners because they believe they aren’t profitable. 

Crypto banking changes the narrative. You don’t need to go anywhere before you can transact, much less bring several documents to have a bank account. With your smartphone and internet connection, you can participate in the global digital economy. Those excluded from traditional banking can send, receive, and save money from the comfort of their homes. Crypto banking removes the barrier to financial access.  

Lower transaction fees

It’s well known that international transfers are costly in traditional finance, costing between 3-7% of the total money. For migrant workers trying to send money back home, this can be a significant hurdle, as the fees will cut deep into their already modest pay. 

Crypto banking eliminates this stress. Remittance costs less than 1%. The best part is that transactions are settled instantly, unlike traditional banking, which takes days or weeks to settle transfers. Furthermore, there’s no intermediary to add to the transfer costs. For example, you can send stablecoins, such as USDT and USDC, directly without intermediaries. This makes the process cheaper and faster, highlighting one of the practical benefits of Blockchain technology.  

Faster settlements (24/7/365)

As explained, you don’t need three days or a week before your money settles. With crypto banking, transactions are conducted instantly, whenever, wherever. Traditional banks operate within set business hours, and they are often hindered by holidays and cut-off times. If cross-border transfers are initiated within these times, expect delayed payment.

Blockchain networks don’t run on business hours and rarely have downtime. They are available 24/7/365. You can send money to a friend or family overseas or perform a large business transaction, and everything is settled instantly.  

Greater user control and privacy

With traditional institutions, users trust them to safeguard their money, process withdrawals, and prevent illicit activities. This model, while convenient, means banks have absolute control over your funds. They can impose restrictions on your account or freeze it if they feel it violates their rules. 

Crypto banking offers an alternative model. Instead of entrusting your money to banks for safekeeping, you use private keys to keep your account secure without relying on centralized entities. Additionally, you have absolute control over your assets. This degree of control bolsters privacy and independence, ideal for individuals who prioritize autonomy.  

Access to yield opportunities (staking, DeFi lending)

Besides payments and savings, which both traditional and crypto banking share, access to yield opportunities can only be provided by crypto banking. Unlike traditional financial institutions that offer less than 1% annual interest on savings, crypto banking through DeFi platforms offers between 5 and 15% APY. 

You can also earn rewards with staking by supporting Proof-of-Stake networks and earn money from peer-to-peer lending. These opportunities are emerging models that build wealth, offering better alternatives to traditional banking.  

Challenges Facing Crypto Banking

Despite the obvious benefits of crypto banking, it comes with risks. The crypto sector contends with several factors, including regulatory ambiguity and volatility. 

Regulatory uncertainty

One of the main issues plaguing crypto banking is regulatory uncertainty. While some regions and jurisdictions have flexible rules, others are strict with crypto use. For example, Algeria recently prohibited its citizens from engaging in any crypto-related activity, citing volatility and fraud. Before Algeria, China placed a blanket ban on cryptocurrencies, including trading and mining, back in 2021, although underground trading and mining is still happening. 

Apart from the prohibition, there’s still a clear absence of rules that sometimes confuses customers and crypto service providers. This is still evident in countries with the so-called “crypto rules.” A lack of both clear and flexible crypto regulations is hindering the industry’s ability to flourish. 

Risk of hacks and smart contract vulnerabilities

Security remains a crucial aspect of the crypto space, which regulators have hinted at as the main reason for their skepticism about crypto use. Although Blockchain is more secure than traditional banking systems, it’s still vulnerable to hacks. If a smart contract isn’t well written and audited, malicious actors can find a loophole to exploit, moving away with millions of dollars’ worth of digital assets. Several well-known hack cases have been reported in the space since the year began, including the $250K hack of Hacken token and $18 million exploit of Iranian exchange Nobitex

Limited Understanding Among Traditional Users

Conservative users still find it difficult to trust crypto due to their preconceived views of volatility and complexity. They believe using digital currencies comes with a great understanding of technology. The lack of enlightenment and advocacy is responsible for the limited understanding. Contrary to popular beliefs, crypto is relatively simple, but without advocacy,  crypto banking will play second to traditional finance. 

Lack of Consumer Protection

Traditional banking has a high degree of consumer protection, such as deposit insurance, fraud protection, and legal redress accessible, available to consumers in the case of a disagreement or financial loss. In contrast, cryptocurrency banking doesn’t offer much consumer protection. No central bank or government is backing cryptocurrencies, and digital assets lack a deposit insurance counterpart.

Volatility and asset risks

Volatility poses another risk to crypto banking. Digital currencies are not stable, except for stablecoins. Prices often experience significant fluctuations over a short period of time. Within a time frame, an asset can plummet or ascend dramatically, which isn’t ideal for investors and financial entities. While this offers opportunities for high returns, it also poses risks for consumers and businesses.

Impact on Traditional Banks

Traditional banks aren’t letting their crypto counterparts continue to capture the market share. Rather than discrediting, major banks are partnering with crypto firms to integrate crypto services. For example, JPMorgan partnered with Polygon to integrate crypto payments. This isn’t an ordinary partnership – it’s an adaptation strategy. Those who don’t embrace the evolution caused by crypto would be left out. 

Many banks are also launching digital asset custody services and stablecoins, thanks to the new provisions in the GENIUS Act. JPMorgan, Bank of America, and Citigroup are at the front lines in this one. However, central banks, seeing this unexpected rise in crypto banking, are pushing their CBDCs. China, for example, placed a blanket ban on crypto, but is advocating for the use of the digital yuan (e-CNY). 

Case Studies & Real-World Examples

Crypto banking is shaping the financial landscape of many countries. Many traditional banks are integrating crypto solutions and applying blockchain technology, enlarging their financial services. Here are some case studies and real-world examples of traditional banks using cryptocurrencies. 

  • Silvergate Bank: This crypto-friendly U.S. bank is one of the first financial institutions to embrace digital currency when traditional banks distanced themselves from the industry. It serves cryptocurrency exchanges, such as Coinbase, Kraken, and Gemini, offering them reliable banking services like fiat deposits, wire transfers, and settlement networks. 
  • AMINA Bank (Formerly SEBA Bank): AMINA Bank, alongside Sygnum Bank, is are fully licensed Swiss banks that focus solely on cryptocurrency services, such as lending, custody, trading, and asset tokenization. AMINA allows institutional and retail investors access to crypto markets seamlessly. 
  • Goldman Sachs: The crypto-friendly institution recently launched a crypto trading desk for Bitcoin and Ethereum options. Additionally, the bank is exploring new concepts around tokenization. 
  • BBVA: Banco Bilbao is one of the largest banks in Spain and the first to introduce custody and crypto loan services. BBVA customers can secure their crypto assets in the bank and access crypto lending. 
  • Binance Pay: Binance Pay is a product of Binance, the world’s largest cryptocurrency exchange. It’s a contactless and borderless service that allows merchants globally to accept crypto payments with minimal fees. Users can pay for goods and services in digital currencies from their Binance accounts, bypassing intermediaries.
  • El Salvador: El Salvador became the first nation to adopt Bitcoin as legal tender in 2021. This move signalled a major institutional adoption of cryptocurrencies. In furtherance of the move, the government followed up with initiatives, such as the launch of Chivo Wallet, to process Bitcoin transactions. The country targeted the unbanked population, who had no access to traditional banking. However, adoption stalled due to technical issues and skepticism from global financial institutions. 

The Future of Banking: A Hybrid Model?

Today, transactions are no longer conducted traditionally. Legacy institutions like JPMorgan Chase and Citigroup that are conventionally known to store, transfer, safeguard wealth, facilitate investments, and credit opportunities have evolved to integrate cryptocurrencies. JPMorgan was the first to embrace digital assets, releasing its stablecoin in 2019. Although other banks like Bank of America have begun allowing crypto transactions, the gap between maintaining traditional banking and embracing crypto still exists.

The financial space is steering towards a future where both crypto and traditional banking will co-exist. We are talking about a hybrid model where a traditional bank will offer DeFi services. Major traditional banks are already doing it, and we could see more banks delve into this phenomenon. 

Conclusion

Crypto banking isn’t just a terminology for fun – it’s a system that’s reshaping the financial space. Traditional banks may hold the lion’s share, but crypto banks are fast capturing attention. They offer speed, transparency, accessibility, and security that legacy systems may find difficult to match. The future of banking may be a hybrid model of traditional solutions and crypto.

FAQs

1. What is crypto banking, and how does it work?

Crypto banking leverages blockchain to provide crypto financial services, such as savings, lending and borrowing, and payments.

2. Can crypto banks replace traditional banks?

No! Crypto banks emerged to complement traditional banks, and not replace them.

3. Is crypto banking safe and regulated?

Its safety depends on the DeFi platform’s security and regulations, as each jurisdiction has different laws.

4. Which are the best crypto banking platforms?

Some of the best crypto banking platforms are Nexo, SwissBorg, SEBA Bank, and Revolut.

5. How is blockchain used in banking?

Blockchain’s immutable, secure, and transparent nature allows crypto banks to provide services without hindrance.

 

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