One of the biggest selling points of cryptocurrency is that it allows people to move away from traditional banking systems. The banks now hope to convince you otherwise.
As US regulators look closely at the cryptocurrency world, it is likely that US banks will soon follow their large foreign counterparts in providing retail customers with the ability to trade and store digital currencies. But why would someone choose to invest through a bank rather than one of the big cryptocurrency exchanges, such as Coinbase? I don’t find many reasons.
Knowing the best place to buy and sell cryptocurrencies will really come back to what is more important to the investor. If having some sort of safety net to help deal with unexpected problems is a top priority, investing through a bona fide bank may be the best route. However, by most other metrics, it’s hard to tell where banks are offering any advantage.
At the moment, cryptocurrency services are only offered to high net worth and institutional clients by major US banks, but this may change soon. Regulators are expected to provide more clarity this year about the types of crypto-related activities that will be acceptable. Despite the volatility of Bitcoin and the current rough correction, it is reasonable to believe that with clearer rules, banks will jump more aggressively.
For their part, consumers seem ready. A December 2020 Cornerstone Advisors survey showed that 60% of crypto holders would definitely use their bank if it offered them the opportunity to invest in digital assets, and another 32% said they might. Only 4% said they would not switch from the exchange they are using.
The indications from regulators, along with legal precedent, indicate that cryptocurrencies are likely to be treated as securities (rather than cash deposits) from a consumer protection standpoint. This means that buying virtual currency through a bank would be akin to buying a stock through the investment arm of the bank.
So it is not likely to be covered by any type of insurance after market losses. But if there is fraud or error on the part of the bank – say, a wrong discount – then long-standing bank and securities regulations will help make customers complete. As of now, cryptocurrency exchange is not subject to those same standards. The protocol for some of the larger exchanges has usually been to provide refunds when system-wide hacks or outages occur, but there have been plenty of exceptions.
For novice cryptocurrency investors, banks may be a more comfortable way to get started due to their familiarity with them. Proponents tout the ease of opening an account through the client’s bank, but this seems to be a less compelling reason. It takes 15 minutes to upload a photo of your driver’s license and fill in some basic information, which is all that most cryptocurrency exchanges require, not that daunting. The purported benefit of having a digital wallet connected to a mobile banking application so that the user can have all the accounts under one roof may be useful, but it is not of paramount importance.
It’s a mixed bag when it comes to security. Banks may have more experience providing account collateral such as multi-factor authentication, but exchanges have more specific experience when it comes to cryptocurrencies.
For those who care a lot about cost, banks are short on there, too. It’s hard to imagine that a major bank would be able to value lower transaction fees than an exchange, with trading fees ranging from 0.1% to 1.5%. To justify entering the space and the additional costs of doing so, banks will have to charge more, especially in the early days, says Gabriel Hidalgo, who advises financial services firms on cryptocurrency.
As banks take tentative steps towards cryptocurrencies, I would expect them to only offer a few different types of currencies (perhaps the most established ones) and possibly restrict movement between wallets. These could be great turnouts for more sophisticated traders.
Remember that Bitcoin and other virtual currencies are Bitcoin, which is a scam of banks. Bank transaction records are unnecessary when there is a blockchain. Their role as intermediaries becomes obsolete when there is direct trading between buyers and sellers. Yes, when there is a problem, the government asks the banks to step in to protect your investment – and for some it may be the most important service. But if you are risk averse, why buy cryptocurrency in the first place?