When Bitcoin was released, it had the lofty goal of giving power back to the people and making everyone their own bank. However, anyone who understands the banking sector and the various complex services that it offers would find this claim preposterous. Over a decade after it was created, Bitcoin is still on the fringes of the finance world. However, the underlying blockchain technology can be used to created services similar to those offered by the world of finance with greater efficiency and cheaper costs. As such, the provision of financial services is no longer the exclusive domain of banks.
Decentralized Finance (DeFi)
Decentralized Finance is an up and coming buzzword. It allows people to connect to decentralized platforms using the blockchain. This is creating a new ecosystem that is an alternative to traditional financial services. The main benefit that this ecosystem offers is greater fungibility. However, it is important to note that while DeFi can mimic banking, it is not able to provide one of the most valued aspects of using banks; security.
A major downside of blockchain-powered platforms is that they cannot withdraw or deposit funds to a bank, which is always a major red flag. Besides that, they are unable to defray liability via legal precedent. There is also a lack of mechanisms to protect investors in case a smart contract does not work out as planned. As a result, true crypto banks are few. However, they do exist.
What are Crypto Banks?
A crypto bank is any bank that offers the standard services offered by financial institutions such as lending, borrowing, savings, and investing. Additionally, these banks offer crypto-related services as part of their services. Besides that, through extensive consultation with regulators, they are considered to be operating legally by regulators.
Two main problems are facing blockchain-based financial solutions. One of them is the ability to operate within the law and the second is the ability to find enough talent to create reliable solutions. In progressive jurisdictions such as Germany, firms can hold fiat and fiat-based assets, which makes it easy to be part of the decentralized ecosystem via a crypto bank. These crypto banks such as Spot9 and Bitwala are essential for creating a skeleton that could one day bridge the crypto world and the traditional world of finance.
In Germany, the nation’s financial watchdog regulates the Bitwala bank. Its deposits are also insured up to 100,000 euros just like other regulated banks in the country. Since the partnership with SolarisBank, which is regulated by the EU, users can do everything that they would do with a regular account.
Some of the largest crypto businesses can imitate banking services. For instance, in the US, Coinbase Custody can offer bank-like services. However, the SEC does not recognize it as part of the banking system. Instead, these businesses are considered investment funds.
The recognition by regulators that crypto can be used to store and transmit value is growing, albeit slowly. As the crypto ecosystem continues to mature, it is quite clear that jurisdictions with liberal banking sectors will benefit the most.