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While traditional banks have been here for many centuries, cryptocurrency-related banking has only been around for less than a decade. However, with the widespread popularity and acceptance of cryptocurrency, it’s only a matter of time before crypto banking becomes a very common thing around the globe. But as a beginner, you must understand the key differences between a crypto exchange, a crypto bank, and other things related to cryptocurrency.
Well, a crypto bank is made by combining traditional banking and blockchain technology. In this article, we’ll go through a few points on what crypto banking actually is and how traditional banks and end users can benefit from this technology.
Crypto Banking
The key features of crypto banks are just like traditional banks. For example, you can open an account with them to deposit, save, and then withdraw your money as per your needs.
The main difference in the case of crypto banking arises in the type of currency being supported by the bank. In the case of crypto banks, they’ll only support deposits in the form of cryptocurrency rather than fiat currency.
Moreover, crypto banks are different from crypto wallets and exchanges as well. That’s because these banks are ensured by the federation under which they’re working and use the permission granted by the financial authorities to open an account and issue credit or debit cards.
How Do Crypto Banks Work?
Every crypto bank runs their new customers through a security check to understand their finances, and only then open their bank accounts and allow them to deposit funds in them. The KYC (Know Your Customer) check is mandatory, just like in traditional banking.
You can also deposit cryptocurrency in your crypto bank by first using a crypto exchange to buy the cryptocurrency in exchange for fiat money and then transferring those funds to your crypto bank. Some banks also have an exchange built into them, which you can use to purchase the required cryptocurrency. You’ll also need a crypto wallet to transfer any cryptocurrency into your crypto bank account.
However, based on their policy, your crypto bank may or may not allow you to access the digital wallet and transfer your cryptocurrency into another wallet. Many crypto banks are offering additional services alongside digital wallets.
Can You Earn Higher Yield?
A few crypto banks are known for providing their customers, both lenders, and borrowers, with great rates. For comparison, traditional banks are currently offering a little below 1% APY for savings accounts. This doesn’t even come close to the amount of inflation we’re seeing on a yearly basis in current times. However, crypto banks are offering as much as 10% APY or even more on stablecoins.
The high APY in crypto banks is possible only because of Arbitrage. This is the difference between the interest rate charged by crypto banks from borrowers and the interest rate paid to their lenders. The profit margin for crypto banks is also way higher compared to traditional banks.
When you deposit your cryptocurrency in the savings account of your crypto bank, that crypto is borrowed by companies and liquidity providers to generate high profits. Since the growth potential in cryptocurrency is limitless, borrowers are always willing to pay high-interest rates on the crypto they borrow.
Can You Use Crypto as Collateral in Loans?
With the help of crypto banks, customers can easily use their cryptocurrency as collateral to get loans at significantly low annual interest rates. This way, they won’t have to sell their cryptocurrency, which might increase in value by many times within the same time.
In the case of cryptocurrency loans, you do not have to go through a lengthy security check before you are allowed to walk away with the borrowed money. Some cryptocurrency platforms can process your crypto loan within seconds. You can choose between fixed and flexible term loans most of the time.
When you are getting a loan through a crypto bank, you will be required to lock your cryptocurrency as collateral. After this, you will be paid your loan in the form of a stablecoin. However, you will have to balance the value of your cryptocurrency if it decreases in comparison to the value of the stablecoin you borrowed. If the value of your collateral decreases, you might be required by the platform to deposit more cryptocurrency to avoid liquidation.
Benefits of Crypto Banking
Traditional banks have been around for many centuries now, and they have actively participated in lots of financial and economic activities in countries around the globe. However, since we are living in the digital age, digitization of the banking and financial system has also become a necessity. That is because the banking system has become stagnant and resistant to the latest changes introduced by Blockchain technology.
Here is how introducing Blockchain and crypto banking and the traditional banking industry can benefit us.
Less Costs
The communication system used by traditional banks around the globe is inefficient and wastes a lot of valuable time as well. Many banking applications require us to introduce my ears which can increase the processing time and make the banking system on par with the demands of this digital age.
Introducing Blockchain technology in the traditional banking sector can prove to be beneficial on many different levels. One of the main reasons why crypto banking is needed is because it eliminates the need for third parties to validate transactions and interfere in everything. Blockchain technology distributes and manages data in an efficient way, which does not require any central authority to control it. According to a survey, investment banks can save up to $12 billion a year just by implementing Blockchain technology in their settlement and clearing processes.
Impeccable Security
Because of the hacking attempts and data breaches focused on banks in recent times, they are trying their best to become more secure and resistant to data theft. Because of cyber attacks and other human errors, the banking industry has leaked the financial data of millions of people in recent years. This is the main reason why investors and borrowers are resorting to Blockchain technology, and more crypto banks are being developed. This technology has the potential to keep itself away from any type of data breach.
Even traditional banks can implement Blockchain technology to keep themselves safe. For example, in the KYC technique, Blockchain technology can be implemented to scan every customer and provide the identities of all customers with full cryptographic protection. Moreover, since sharing data and information across the Blockchain is very easy and straightforward, there is no need for a third party to intervene in the process. Since there is no central authority controlling the Blockchain, the number of human errors can practically be reduced to zero, and there will be no chances of a data breach.
Moreover, banks can benefit from smart contracts, which are also enabled by Blockchain technology. These contracts can be designed to execute transactions automatically when certain requirements are met.
Instant Transactions
Since Blockchain technology does not include any intermediary or third party, the transactions are usually instant. The speed of transactions is already attracting many investors and lenders around the globe. Especially, cross-border transactions can be made instantaneous with the help of Blockchain technology. This will make the banking sector way faster without compromising on any security measures.
Today, every bank relies on the SWIFT system to process cross-border transactions by sharing data between different banks. However, with the help of Blockchain technology, all the lenders can be linked with each other, and there will be no need for intermediaries like SWIFT. Moreover, SWIFT has already been hacked many times, and this proves that blockchain technology has become a necessity, especially in international transactions.
Various financial experts have already mentioned the need for every asset to be bound with blockchain.
Minimum Chances of Error
Crypto banks can use blockchain technology to make smart contracts. These contracts have the ability to execute transactions automatically without the margin for human error. This also resolves any type of trust issues between two parties going through a transaction.
Therefore, if traditional banks are to reduce the chances of error in their daily operations, Blockchain technology is the best way to go forward.
Digitization of Currency
With the help of Blockchain technology and crypto banks, we can digitize any type of asset. This is the main reason why crypto banks only support cryptocurrencies. Unlike fiat money, cryptocurrencies can be used for technological advances, and even physical assets can be bound to them to be traded on the blockchain.
Most cryptocurrencies are unsupported by banks today, but many large banks are already working on their own digital currencies. This is because they have realized the importance of cryptocurrency in this digital age.
Many large banks have not only shown interest in this field, but they’re also investing heavily in blockchain-related projects. This will help them implement this technology in their infrastructure and take benefit of the growing cryptocurrency market as well. That’s why some banks are already working on making their own digital currencies.
Why are Banks Afraid of Cryptocurrencies?
Despite all the benefits cryptocurrency and Blockchain technology provides us with, the banking sector has its own reservations on certain points related to this new digital asset.
Let’s discuss some of the most valid reasons why the banking sector is worried about cryptocurrency.
Decentralized Nature
By their very nature, every cryptocurrency is made to be completely decentralized. This means that no central authority has control over the flow or value of that cryptocurrency. Instead of including third parties in transactions, cryptocurrency relies on its Blockchain technology to secure every transaction and execute it as fast as possible.
If banks introduce and support cryptocurrency but control it as well, it will kill the main purpose of cryptocurrency in the first place. So, just because central banks are not willing to give away their authority just yet, they think that cryptocurrency is a threat to their very existence. Moreover, banks think that they won’t be able to control the supply of cryptocurrency once they introduce it.
Volatile Market
In addition to being decentralized, the cryptocurrency market is also extremely volatile. The volatility of every cryptocurrency depends on so many different factors. Banks consider the volatility of cryptocurrency as another drawback. That is because an unstable past might indicate that cryptocurrency is not a suitable medium for investment.
Money Laundering Concerns
Another genuine concern put forward by banks around the globe regarding cryptocurrency is related to the way the Blockchain processes every transaction. That is because crypto transactions are done instantaneously, without confirming any type of identity and without requiring the user to pay any fees. While this enables fast transactions, it raises money laundering concerns around the globe.
Banks still think that cryptocurrency transactions are either really hard or even impossible to trace. They think this might promote scams and illegal activities in the financial market, which would be uncontrollable in the case of cryptocurrency.
How Can Banks Move Forward With Crypto?
In addition to crypto banks and exchanges, traditional banks also need to move forward with the latest crypto technology. This will make sure that they are not left behind in this technological race. If every bank adopts cryptocurrency, it has the potential to make the financial industry much better and more secure than it is today.
Here are a few ways how banks can move forward with crypto.
Crypto Custody Service
Just like other types of custody services, banks can also offer to take custody of your crypto keys or the cryptocurrency itself. This will be a win-win situation, both for traditional banks and for the cryptocurrency market.
Providing Crypto Security
Big banks can use their developed security tools and applications to secure cryptocurrency for their customers. This will not only make every cryptocurrency transaction really secure but will also help in boosting the acceptance of cryptocurrency around the globe.
Faster Payments
Federal authorities around the globe have allowed the use of Blockchain in the banking sector to make faster payments possible. Blockchain is way faster than SWIFT, and it can be used to clear transactions instantaneously while keeping every security major in mind. This is the main reason why even central banks, and other related authorities, are also allowing banks to use Blockchain technology in order to make their transactions significantly faster.
Using Smart Contracts
Even without the intervention of traditional banks, smart contracts are being used today in order to make transactions between different parties who do not know each other. Banks can make it even easier and more secure by using smart contracts on the Blockchain to provide their customers with mortgages and other financial services. This way, even if a customer and bank do not trust each other, they both can trust Blockchain technology to execute all the commands written on the smart contract when the right time arrives.
Providing Assistance
Banks can also provide assistance services in order to help new investors invest in cryptocurrency and Blockchain technology. That is because not every person is fully aware of this incredible investment opportunity, and they might not even know how to create a digital wallet and an account with a cryptocurrency exchange. Moreover, if the banks also offer to hoard cryptocurrency for their customers, they will feel at ease since they already trust the bank with their money.
Banks can also introduce time deposits for cryptocurrency with higher interest rates as compared to fiat money. High rates are possible just because the cryptocurrency market is booming, and borrowers are willing to pay high-interest rates on the loans they take. This is an incredible opportunity, both for crypto banks and traditional banks, to earn lots of money while providing their customers with expert assistance and other financial services.
Conclusion
Crypto banks are finally here, and they are here to change the financial industry forever and make it much better than ever before.
We are living in a digital age, and traditional banks are suffering from regular hacking attempts and successful data breaches every day. These activities have caused millions of people around the globe to lose their money and even their personal data to notorious hackers.
All of these issues can be easily patched with the help of Blockchain technology. That is because cryptocurrency and everything else on the Blockchain are completely decentralized, and there is no central authority controlling the whole thing. Decentralization is the main reason why every person can trust Blockchain technology. When there is no third party in an agreement or transaction, there are almost no delays, and all the trust issues are also sorted out.
However, traditional banks are still skeptical of the benefits provided by crypto banks. This is because they think cryptocurrency and decentralization will take away their authority. But sooner or later, traditional banks will also have to embrace this change and will have to work together with the crypto industry to transform the global financial market.
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