One of the biggest strengths of cryptocurrencies is that they allow people to break away from traditional banking systems. Now the banks are hoping to convince you otherwise.
As US regulators take a closer look at the world of cryptocurrencies, it is likely that US banks will soon follow their large overseas counterparts by offering retail clients the ability to trade and store digital currencies. But why would anyone choose to invest through a bank instead of one of the big cryptocurrency exchanges, like Coinbase? I can’t find many reasons why.
Figuring out the best place to buy and sell cryptocurrencies will really depend on what’s most important to the investor. If having some sort of safety net to help deal with unforeseen problems is a top priority, investing through a bona fide bank might be your best bet. With most of the other measures, however, it is difficult to see where banks offer any advantage.
Right now, only institutional and high net worth clients are being offered cryptocurrency services by major US banks, but that could change soon. Regulators are expected to provide more clarity this year on what types of cryptocurrency-related businesses will be acceptable. Despite the volatility of Bitcoin and the current dire situation, it is reasonable to think that, with clearer rules, banks will come into play more aggressively.
For their part, consumers appear to be ready. A December 2020 survey by Cornerstone Advisors showed that 60% of cryptocurrency holders would definitely use their bank if it offered them the opportunity to invest in digital assets, and another 32% said they could. Only 4% said they would not transfer from the exchange they use.
Signals from regulators, along with legal precedents, indicate that cryptocurrencies would likely be treated as securities (not cash deposits) from a consumer protection standpoint. This means that buying a virtual currency through a bank would be similar to buying a stock through a bank’s investment arm.
So it would probably not be covered by any type of insurance as a result of market losses. But if there has been fraud or a mistake on the part of the bank, such as an incorrect debit, long-standing banking and securities regulations would help keep customers healthy. As of now, a cryptocurrency exchange is not subject to the same standards. The protocol for some of the larger exchanges has typically been to provide refunds in the event of a system-wide hack or outage, but there have been many exceptions.
For novice cryptocurrency investors, banks may be a more comfortable way to get started due to their familiarity. Proponents tout the ease of opening an account through a customer’s reference bank, but this seems like a less compelling reason. Taking 15 minutes to upload a photo of a driver’s license and fill out some basic information, which is all that most cryptocurrency exchanges require, isn’t that arduous. And the supposed benefit of having a digital wallet connected to a mobile banking application so that a user can have all accounts under one roof could be useful, but not critical.
It’s a mixed bag when it comes to security. Banks may have more experience providing account safeguards such as multi-factor authentication, but exchanges would have more specific expertise when it comes to cryptocurrencies.
For those who are more concerned about costs, the banks are also not up to par. It’s hard to imagine that a large bank would be able to value lower transaction fees than a stock exchange, where trading fees range from 0.1% to 1.5%. To justify entering the space and the additional costs to do so, banks will have to charge more, especially in the early days, says Gabriel Hidalgo, who advises financial services firms on cryptocurrency.
As banks undertake cryptocurrency attempts, I expect them to only offer a few different types of coins (arguably the most established) and potentially restrict movement between wallets. Those could be major obstacles for more sophisticated traders.
Remember, the main purpose of Bitcoin and other virtual currencies is to bypass banks. Bank transaction records are not needed when there is a blockchain. And their role as intermediaries becomes obsolete when there are direct exchanges between buyers and sellers. Yes, when there is a problem, the government requires banks to step in to protect your investment, and this may be the most essential service of all for some. But if you are so risk averse, why are you buying cryptocurrencies in the first place?