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What is crypto banking?
Let’s start with the “crypto” part. Cryptocurrency, or crypto for short, is a digital form of money backed by computer code instead of a central banking authority, such as the Federal Reserve. There are more than 9,000 cryptocurrencies. Only a handful, such as Bitcoin and Ethereum, have widespread appeal.
The term “crypto banking” is relatively new and can take a few different forms. Generally, the way people interact with cryptocurrency is by investing. That can involve buying and selling digital currencies on a trading platform. Traditional banking, on the other hand, is focused on managing cash and credit at a bank, such as with checking and savings accounts and loans.
Crypto banking can refer to managing digital currency at a financial technology firm or financial services provider. These banking services can include simply holding a balance, making payments and even earning interest involving one or more cryptocurrencies. And at least one bank has integrated crypto into its products.
Crypto banking is a growing and quickly evolving concept. Here’s a closer look at some of its key aspects.
How do I get started?
To manage cryptocurrency, you first need to buy it. And to do that, you need a crypto wallet, which holds proof of your digital assets. Many companies that let you buy crypto can also hold it on your behalf in their free crypto wallets.
If you use a crypto exchange such as Coinbase or a financial tech firm such as PayPal, buying crypto can be straightforward: You can pay in U.S. dollars and receive the equivalent value in the digital currency you choose. Then, you can view your balance as you would a bank or investment account balance. Depending on the company, you may be able to send and receive crypto from others.
Choose where you buy crypto carefully. Some companies, including PayPal and SoFi, don’t let you withdraw crypto from their platforms, so you must sell to use those funds elsewhere. Crypto holders who plan to use multiple platforms or bitcoin ATMs for in-person transactions should consider crypto wallets that provide storage on software personally hosted on their computer or portable device. Such wallets let you make transactions without needing a company to confirm them.
Fintech firms that let you buy crypto
Peer-to-peer payment companies Square and PayPal let customers buy, sell and hold cryptocurrencies, alongside any balances held in U.S. dollars. Banking technology firms Revolut and SoFi have similar offerings.
PayPal also lets you pay for online purchases with a crypto balance, which means you sell the currency back to PayPal at checkout.
Since these companies have established presences with mainstream banking services, they may be easy starting points to explore crypto. But watch for transaction fees and limits. Square’s Cash App, for example, offers purchases of bitcoin only, while PayPal and others offer three or more cryptocurrencies.
One bank that offers bitcoin rewards
Unlike nearly all other U.S. banks, Quontic Bank provides a way for customers to get bitcoin. In December 2020, the bank launched a bitcoin rewards checking account. Few banks offer rewards checking options — and when they do, they typically provide interest or cash back.
At Quontic, when you make a debit card purchase, 1.5% of the transaction amount in U.S. dollars gets converted into bitcoin and managed by a third-party firm. There is no maximum you can earn. The account has no monthly fees, and your money in dollars is FDIC-insured.
“The nice thing about the bitcoin rewards checking is that you’re not risking your own money. So if [bitcoin] goes down, you haven’t lost anything,” says Steven Schnall, CEO of Quontic Bank.
You can’t withdraw the bitcoin to use elsewhere. Instead, you redeem it in dollars, which costs a 2% fee. The account is available in 27 states and Washington, D.C.
Crypto interest accounts
More than a dozen crypto-based companies such as BlockFi and Abra offer their versions of a savings account, generally called a crypto interest account. These firms do something similar to what traditional banks do, but with crypto instead of dollars: The firms borrow the money in your savings account to make loans to other customers and pay you interest in return.
While the national average rate for traditional banks’ savings accounts is barely above zero, rates on a crypto interest account can be 8% or 12% annual percentage yield. If that sounds too good to be true, consider the risks and complexities around cryptocurrencies.
Rates can change with market demand, and when a cryptocurrency drops in value, you can lose more money than you earn in interest. Comparing APYs isn’t as intuitive as with traditional savings accounts where all accounts use the same currency. And consider fees and how long it can take to withdraw money back into U.S. dollars, especially since you’re lending out what’s in your crypto interest account.
“If you’re lending out your crypto … you have to be dedicated to educating yourself,” says Leah Jonas, head of global partnerships at Celsius, a crypto marketplace that offers loans and interest accounts.
General risks with cryptocurrency
Your crypto isn’t protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation if the company you buy it from fails. For a bank account, the FDIC insures up to $250,000; and for a brokerage account, the SIPC covers up to $500,000. (SIPC coverage excludes losses from declining values of stocks and other assets.)
The value of cryptocurrencies can fluctuate rapidly. “You don’t want to put anything into crypto you can’t afford to lose,” says Ryan Cole, certified financial planner and founder of the investment advisor firm Citrine Capital in San Francisco.
What’s the future of crypto banking?
More banks will likely let customers buy and sell cryptocurrency soon, especially in partnerships with third-party firms. In February 2021, the Oklahoma-based Vast Bank announced a service to let customers buy and hold digital assets, and the Black-owned neobank First Boulevard partnered with Visa to pilot a similar offering. Financial technology provider Kasasa plans to bring Bitcoin wallets to its network of over 900 community banks and credit unions.
Existing crypto platforms, meanwhile, hope to see crypto change the way we bank.
“This first generation of crypto services like Abra need to eliminate the gaps that still mandate the need for traditional banking. I still need to pay bills [and] easily shop online” in dollars, says Bill Barhydt, founder and CEO of the crypto payments app Abra.