To date, cryptocurrency exchanges are the primary (if not the only) way for people to convert fiat currency into cryptocurrency, or vice versa, but with the rise of crypto banks this may change. The skills required for owning and managing a crypto wallet overburden many users with risk and responsibility, but crypto banks could solve this user experience issue. The biggest problem is that crypto regulations cannot agree on is which asset class cryptocurrencies belong to.
The United States SEC has been the most aggressive, often asserting that most cryptocurrencies, including dollar-backed stablecoins, are actually securities and need to be registered and sold on regulated securities exchanges. Meanwhile, the CFTC treats cryptocurrencies as commodities until proven otherwise, and has a far more lax approach. The ongoing war of regulatory uncertainty increases the gap between the DeFi, CeFi, and TradFi sectors, and crypto exchanges are still the only way to convert between fiat currency and cryptocurrency. To date, existing institutions are hesitant to adopt blockchain and digital assets due to the ambiguity.
This is where crypto banks could be useful. As CoinTelegraph explains, crypto banks are legally chartered banks that offer digital asset services. While (TradFi) banks are often hostile to crypto, ‘crypto banks’ offer cryptocurrency custody, purchasing, and on-chain withdrawal/deposit services, combining a bank-controlled crypto wallet with a traditional bank account. Because customer accounts are linked to a crypto wallet, crypto banks could potentially offer Decentralized Finance (DeFi) services for their customers, providing an edge over TradFi banks, but regulations are still unclear. The ability to use blockchain assets within a banking app alongside off-chain fiat currencies would bypass the need for a crypto exchange account, improving the end user’s experience and allowing users to receive stablecoin payments and transfers.
Blockchain Is Hard, But Banking Is Easy
The biggest hurdle to mass-adoption for Web3, except privacy issues, is the convoluted and risky user experience. Currently, all users must own an account with a crypto exchange, and they must know how to navigate the app to buy/sell crypto. Withdrawing or transferring crypto ‘on-chain’ in any context is risky, as there are no protections for sending crypto to the wrong address. When creating a crypto wallet, users must write down a randomly generated 12-24 English word ‘seed phrase,’ without which they cannot recover their wallet if anything happens to their device. Users must also manage blockchain gas fees and gas fee timing, or risk overpaying for a simple transaction, alongside watching out for signs of scams, hacks, and phishing attempts. Responsibility is very high for users who want to be their own banks, and the complexity of using blockchain technology increases the risk of mistakes, making adoption improbable for most people.
What many people in crypto don’t understand is that most people do not care about being their own bank enough to overcome the learning curve for self-custody. Many Web3 decentralized applications (dApps) are useful and interesting, and would likely find a decent Web2 user base if they were accessible from a bank account, or from an app connected to one. For now, the ability to buy, sell, withdraw, and deposit crypto and stablecoins from a single bank account is a huge step forward, and that is what crypto banks are bringing to the table. While it does not improve self-custody experience, it does remove crypto exchanges from the picture, which vastly reduces the complexity of sending money from a bank account to a personal crypto wallet, or vice versa.
A crypto bank is a legally chartered bank that offers cryptocurrency trading, withdrawals, and deposits alongside regulated banking services, which can vastly improve the overall user experience while offering the same security and protections that banks provide. While many TradFi banks are cold or openly hostile to crypto, crypto banks founded upon cryptocurrency and blockchain are blazing a new trail for the next generation of institutions, and will play a key role in the coming Web3 internet revolution.