Cryptocurrencies are gaining massive popularity globally. Despite the pandemic, the global growth in cryptocurrency market capitalization has been phenomenal; with over 11,000 cryptocurrencies operational today the rate of innovation in the crypto industry is unprecedented.
Cryptocurrencies are disrupting the financial sector, with new applications and models being developed rapidly to redefine the flow and circulation of money, making cross-border payments, credit and loans, and complex financial products like futures and derivatives. The crypto industry has given rise to the decentralized finance sector, which fuels the growth in cryptocurrency market adoption.
The existing banking and financial institutions are hampered by a number of geopolitical and legal limitations, which prevent them from reaching a broader audience, particularly in the fast-paced digital era that we are living in today. Apart from that, these systems have difficulties with fundraising, securitization, loans and credits, among other things.
The need for crypto assets financing applications has given rise to crypto banks, where funds from one party can give loans to another party following the foundational principles of centralized banks. Crypto banks are becoming an attractive option for cryptocurrency holders worldwide.
It can be stated that crypt banks are more technology driven banks, however, things aren’t that straightforward. In order to understand more technical details behind crypto banks, we will be explaining right from the start how crypto banks were initiated, their existing situation, and their future.
What is crypto banking?
The phrase “crypto banking” is a relatively new concept that may take on a variety of distinct meanings. Generally speaking, the most common method for individuals to engage with cryptocurrencies is via investment. This may include the purchase and sale of digital currencies on a trading exchange platform. On the other hand, traditional banking is concerned with the management of cash and credit within a centralized financial institution, such as with checking and savings accounts and loans, etc. Moreover traditional banks follow a centralized authority for creation of rules and regulation which are subject to change.
It is possible to manage digital money at a financial technology company or a financial services provider under “crypto banking.” Simply maintaining a balance, making payments, and even collecting interest are all possible using one or more cryptocurrencies in conjunction with these financial services. But simple money management is not the end of the road for account management of crypto assets. Being a utilizable instrument, there are a wealth of possibilities of using crypto funds for different financial purposes.
A cryptocurrency bank is a financial institution backed by the promise of decentralization and permissionless and trust-less architecture that processes digital money-related transactions such as deposits and withdrawals and lending and borrowing and saving and investing across a wide variety of marketplaces.
In layman’s words, Crypto Banks are platforms that enable cryptocurrency holders to store and trade their crypto assets and use them for everyday payments like bills and groceries.
The existence of a cryptocurrency wallet, which stores crypto assets and allows users to conduct complete crypto banking transactions such as depositing, saving, transferring, and more, is the most noteworthy aspect of crypto banking. Crypto banks don’t require lengthy onboarding documentation, the need to verify thumb impressions or anything of that sort. The process is quick and seamless and one can begin using the account within minutes.
Advantages of Using Cryptocurrency for Banking
The use of cryptocurrency and blockchain technology may be beneficial to the banking industry in a variety of ways. A few advantages of crypto banking over the conventional banking system are outlined in the following sections.
- Cost savings across the board for all financial and banking procedures.
- As a result of the use of blockchain in crypto banks, the system’s overall security is enhanced.
- The quality of data is enhanced when data retrieval methods are simple to use.
- Because crypto banks deal with digital currency, the likelihood of hacking and fraud will be reduced.
- Error management and reconciliation are now more efficient and straightforward.
How Does the Cryptocurrency Bank Operate?
Crypto banks work in a similar fashion to traditional banks. Users need to create accounts with the bank they want to do business with, in the case of a crypto bank this would be a wallet. Due to a large number of wallets available, they may be split into two categories: custodial wallets and non-custodial wallets, for the sake of simplicity:
custodial wallets and non-custodial wallets.
Many trustworthy crypto apps will use custodial wallets. The vast majority of users choose non-custodial wallets, which allow them to retain full control over their funds.
The following is the flow of the banking process: if one wishes to start a transaction, he must give a private key that he has obtained when enrolling, which functions similarly to a PIN in conventional banking.
There will be no participation of a third party or middleman, which removes the need for exorbitant interest rates.
If the transaction is to be conducted via cryptography, he should provide his public keys with the other party to start the transaction.
In any kind of crypto banking, this is the transactional process that takes place.
Other banking procedures, such as lend and borrow in crypto banking, do not need the use of intermediaries in the loan processing. As a result, we may lend or borrow our cryptos using collateral like bonds, real estate, or anything else we want.
The Smart Contract’s responsibility is to manage the lending and borrowing process, which is secured and safeguards high-interest rates. This new generation of smart contracts automates every financial transaction in seconds, reducing the length of time it takes to process loans and lendings.
In this way, cryptocurrency banks outperform conventional banks when providing consumers with quicker and more convenient financial solutions.
Interest rates of crypto banking:
For cryptocurrency holders who want to earn interest from their crypto saving there are many options available in the market today. Crypto banks offer their own versions of a savings account, which are referred to as crypto interest accounts in the industry. These businesses operate in a manner similar to conventional banks, but with cryptocurrency instead of dollars: they borrow money from your savings account to make loans to other clients, and in exchange, they give you interest.
While the national average rate for savings accounts at conventional banks is just over zero, the rates on cryptocurrency interest accounts may be as high as 8 percent or 12 percent annual percentage return, depending on the cryptocurrency. In case that seems too good to be true, think about all of the dangers and complications that come with cryptocurrency.
Demand in the market may cause interest rates to fluctuate, and if the value of a cryptocurrency decreases, you might lose more money than you receive in interest. In contrast to conventional savings accounts, where all accounts are denominated in the same currency, comparing APYs is a little more complicated. Also, keep in mind the costs and time it may take to get your money back into U.S. dollars, mainly if you’re lending out the money in your crypto interest account to others.
Why Crypto Banking is the way of the future in the digital economy
In order to achieve safety and security, cryptocurrency and blockchain are now in the process of being adopted, which will result in the adoption of crypto-related implementations and developments in the near future. As a result, the digital economy and the adaption and worldwide adoption of crypto banking are well underway, intending to provide simple, secure, quick, and transparent financial and banking services to all people across the world.
Cryptocurrency banks are becoming a reality, and they have the potential to take the global banking industry to the next level. The consequence is that cryptocurrency and blockchain technology have the potential to raise the performance of almost any sector or business operation to a new degree of excellence.
Cryptocurrencies can address some of the most difficult issues within the financial ecosystem today and bring about new levels of transparency, trust, and scale in the financial system at large. With the increasing market acceptance of cryptocurrencies, the fast development of cryptocurrency technology, and financial institutions’ large-scale involvement in cryptocurrency markets, how banks compete in the digital world has been fundamentally altered for the long term.
In a few years, the crypto-economy will have grown to more than ten trillion dollars. By extending the payment infrastructure, inventing new cryptocurrency payment scenarios, and lowering interest rates, crypto-banks will mark a new turning point in developing the connection between the decentralized economy and future everyday life.
The advantages of crypto banks are myriad. Crypto banks reduce operational expenses and are easier to manage and maintain, they remove the need for having unnecessary intermediaries, they bring in transparency and decentralization, eliminating friction in the account creation and account closure processes, they remove the need of applying spending limits or withdrawal limits, all these features make crypto banks a formidable option for consumers worldwide.