Crypto Banks, Decoded: All You Need To Know About

High-end technologies of the day encompass buzzwords of the order of AI, Machine Learning, Cryptocurrency, Blockchain, Big Data, and a few more. Here we converge our focus on the blockchain and cryptocurrency Cryptocurrency, simply put, is digitized money. It is popularly decentralized money. This was first introduced in the form of Bitcoins which soared in value and popularity with time. Many enthusiasts and staunch believers of the potential of cryptocurrency take the concept forward. These people have further stretched the possibilities to form crypto banks.

The crypto banks, again, have garnered their own share of believers and naysayers, which is a story for another time. But, this surely gives rise to pertinent questions. How different are crypto banks from their traditional counterparts? More importantly, why are needed, at all?

Also Read: How Asset Tokenization is Bringing Stability into the Global Economy

Limitations of Traditional Banking

Before seeking answers to the aforementioned questions we need to know how and where traditional banking is lacking.

1. Centralized Control, Dependence on Intermediaries
The very concept of banking, of leaving your life’s savings to a Third-party entity to the game on, is unnerving if we begin to think of it. Yet another cloud that insecurity stems from the concern: what if the bank goes bankrupt?

2. Flexibility and Availability Issues
The traditional process mandates periodic visits to the banks during operational hours for even minor issues like a re-KYC or an update of account details.

3. Nose-diving Rate of Interest
The interest earned from saving and other securities earn interest from the banks. The diminishing rates of interest impact the lives of those, especially the elderly, who survive on them. On the other hand, the rates of interest imposed on loans and mortgages are progressively skying.

Crypto Banking

Rather than imagining Banking as a ‘brick and mortar institution, one can perceive it as a process. The blockchain and cryptocurrency were conceived in the first place with the idea of putting the control back to the individuals and also to stave off the situations arising from recession and inflation.

Crypto banking is the process of the influx of cryptocurrencies into the market for utilizing in the same way as any fiat currency. This also aims to facilitate seamless conversion of crypto into fiat and vice-versa as per requirement.

Crypto Banks are, in essence, the platforms like cryptocurrency apps, that enable users to stash their crypto assets, as well as manage daily expenses. Cryptocurrency exchanges serve as a new variety of storage of crypto that can form an effective and convenient alternative to conventional banking.

Crypto wallets are an important part of crypto banks that facilitate other banking functions like, Lending and Borrowing.

Opposed to Conventional Banking

In the conventional banking system, people deposited their savings into their accounts. Market regulations govern the currency value and the rate of interest.

With crypto banking, it is up to the users to do their own bidding such as borrowing or authorizing transactions. Also, the value of these currencies is subject to rising and fall as per market demand and supply.

Also Read: How the Emergence of CBDCs will Impact Global Economy and the Financial Sector

Working of the Crypto Banks

Transactions: For a transaction to be made a user pays using his crypto assets saved in a crypto wallet. The wallet may be custodial or non-custodial. Generally, individuals go for non-custodial wallets since it grants more autonomy to users.

A person initiating the payment would log in with his private key, which they received during registration. Then he may access his account and make the required payment without incurring high transaction fees.

A person receiving his payment will share his public key with the payer, this is akin to sharing one’s account number. This public key is the address where the payer will direct his payment.

Loan and Repayment: A person may request a loan in lieu of his crypto assets. For instance, a person has 2 BTC and needs an amount urgently. But he does not want to liquidate his Bitcoins in anticipation of their appreciations. He may request a loan during which time his crypto assets will act as collateral. This will transition into a collateral wallet which he cannot use until his loan and interest payment completion. The loaned amount will be available to him in stable coins. His Bitcoins will return to his wallet after the repayment of his loan and interest amounts.

Disadvantages

Impediments in the path of its adoption are many. The low transaction cost may not be availed in countries, still hostile to decentralized finance. Many countries are in favor of imposing regulations to an extent of stifling its potential for growth.

While borrowing from a crypto account you must always ‘over collateralized. This means you must always lock up more crypto assets than the overall value of your loan. The crypto would be at a risk in case the borrower fails to keep the terma on the loan or if the value of the crypto depreciates.

Final Remarks

It is quite apparent that Crypto Banks reserve the potential to offer a more convenient mode of banking than the conventional form already existing. However, more number of proven cases must surface so as to gain the trust of organizations and individuals. Meanwhile, the hostile government may also warm up to the immense possibilities in this regard.