The vague notion of a “Crypto Bank”

    15 Aug 2021

    The concept of a “crypto bank” has grown increasingly popular in recent years. It’s only natural: where there is money, there is a bank. And crypto money needs a crypto bank. But in fact, the whole thing has been rather difficult to define so far.

    To begin with, there are as many as four definitions of a crypto bank:

    1. A cryptocurrency-based service on the blockchain, similar to a banking one, that uses smart contracts and is powered by DAO.

    2. A commercial company (fintech company) that provides services for working with cryptocurrencies, similar to those that a regular bank provides to fiat money owners.

    3. A traditional bank that has updated its services to work with cryptocurrencies.

    4. A commercial company that has created its own centralized blockchain and uses smart contracts, providing services for working with cryptocurrencies

    Typically, the crypto bank services include managing cryptoassets, storing private keys, and investing in a cryptocurrency portfolio. Such platforms usually combine the features of crypto exchanges, currency exchangers, and p2p-lending and deposit services. Many crypto companies even add the word “bank” to their name just to sound more authoritative.

    In most cases (though, of course, not all of them), crypto banks don’t have a large equity capital comparable to the authorized capital of a conventional banks. Nevertheless, they perform a crucial function of creating a service and payment infrastructure for connecting the crypto community with the fiat world. That being said, the operational principles and internal business processes of crypto banks are very different from those of traditional banks.

    Here, of course, a lot depends on the regulators – in many countries, national financial regulators don’t allow crypto companies to use the “bank” label without a banking license. Naturally, many crypto banks would like to receive the license and become “legalized” in the eyes of the state and clients. However, in reality, this is an almost insoluble task: no one has ever tried to make blockchain consistent with the regulatory environment.

    Although there are countries with progressive regulatory policies, such as Germany, that allow fintech companies dealing with fiat money and assets to also participate in a decentralized economy and call themselves “crypto banks”. A typical example is Bitwala, an online bank licensed by SolarisBank AG, one of the top German banks. In 2020, Bitwala began accepting deposits in Bitcoin. The annual interest rate on cryptocurrency deposits is 4%. The ability to support them came from a partnership with the Celsius Network crypto lending platform. Bitwala became the first fiat bank in the country to offer payments for holding BTC.

    Regulated by the German Federal Financial Supervision Authority, Bitwala deposits are insured under the German 100,000-euro deposit guarantee scheme, as in other banks in the country. Since the “primary” SolarisBank is subject to the EU rules, this guarantees Bitwala account holders the same rights they would enjoy with a traditional bank account.

    In this case, a regular centralized financial organization has simply expanded its activities to the crypto space. By creating a crypto bank, the Bitwala company aims to bring together the worlds of traditional and decentralized financial systems. The Berlin-based organization was the first to offer the “all in one” platform, which includes a bank account, a built-in BTS wallet, a debit card, and crypto trading tools. With the Bitwala smartphone app, available in 31 European countries, users can start trading bitcoins directly from their bank accounts in a matter of minutes.

    The Coinbase crypto exchange tried to create something similar, starting with the Coinbase Custody service, which provides crypto custody services and the ability to legally invest fiat money in cryptocurrencies, as well as, of course, integration with the Coinbase Pro exchange and deposit insurance.

    In September 2020, the Kraken exchange also began operating as a crypto bank. The company received a banking license in Wyoming, which allowed it to conduct deposit operations in the Kraken Financial division. A year earlier, the Swiss financial regulator FINMA first issued banking licenses to two blockchain companies: SEBA Crypto AG and Sygnum AG. The Sygnum bank even created its own Swiss Franc-backed digital payment token that can be used for settlements on its platform. Michael Novogratz’s Galaxy Digital project is often called the very first crypto bank. It is considered an investment bank: mainly working with ICOs, it lacks solutions for traditional customer transactions.

    In January of this year, the first federal-level cryptocurrency bank was opened in the United States as well. The US Office of the Comptroller of the Currency (OCC) has licensed Anchorage, which provides digital asset custody services, in particular for institutional investors.

    As you may have noticed, all the services mentioned above are centralized, albeit very differently arranged. DeFi crypto banks are already being created but have not yet announced themselves loudly enough.

    What are services provided by those crypto banks already on the market? Here are some examples:

    – The UK-registered Wirex crypto bank provides you with a Wirex Visa card that enables you to pay in crypto wherever Visa cards work. TenX and offer similar opportunities.

    – The Swiss Sygnum crypto bank tokenized Pablo Picasso’s painting “Fillette au beret”. Investors can buy a share of the painting for 1000 Swiss francs (~ $ 1088). It is the first time that a regulated bank has tokenized a work of art. To this end, Sygnum issued 4,000 tokens, secured by a share of the painting ownership (Art Security Tokens, ASTs).

    – Sygnum also offers its clients to make money on Ethereum 2.0 staking. Previously, it has allowed trading and storage of DeFi tokens. The bank added support for Aave, Aragon, Curve, Maker, Synthetix, Uniswap, and 1inch Network, as well as banking services using the USDC stablecoin.

    – The MinePlex crypto bank was one of the first on the market to launch a crypto processing service, available not only to European users but also to clients from the CIS countries.

    – The Bank of France, in coordination with the Swiss SEBA crypto bank, has recently completed a pilot project on CBDC-based securities transactions. Testing has shown the CBDC capabilities when it comes to interactions between distributed and traditional financial systems. As part of the experiment, the partners used CBDC to simulate the settlement and delivery of public shares under the European TARGET2-Securities (T25) mechanism.

    – Michael Novogratz’s Galaxy Digital crypto bank expanded its business by purchasing the BitGo custodian service.

    – In addition, Galaxy Digital became a liquidity provider for Goldman Sachs in BTC futures transactions on CME. – In partnership with one of the oldest US banks, BankProv, the Anchorage crypto bank has launched an Ethereum-backed USD lending service.

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