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How Are Crypto Banks Different From Traditional Banks?

  • Yamini
  • Feb 07, 2022
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After grappling with long challenges regarding opening bank accounts to fund operations, crypto firms have turned to seek their own banking charters. 


Most recently, bitcoin and cryptocurrency payments company BitPay filed paperwork with the U.S. Office of the Comptroller of the Currency (OCC) to create a national bank —named the BitPay National Trust Bank. 


This bank bid came after OCC acting comptroller Brian Brooks revealed plans to empower payment firms to operate across state lines with a single set of consolidated rules and also stated that the OCC is ready to begin accepting applications.


We all have been intrigued by the arrival of cryptocurrencies in our life. Words such as bitcoin, blockchain, crypto, have been trending for much time now. Cryptocurrency capitalization is on the rise since the expansion of the enormous digital world. 


Though Bitcoin is constantly striving to substitute traditional banks, the task was not reached in 2021. Some experts do not even treat Bitcoin as a full-fledged currency. 


However, this does not mean that the number of cryptocurrency operations between customers and businesses (including such traditional and closed niches as real estate, insurance, and aviation) is not on the rise.


This has become a well-known fact that Blockchain development services and cryptocurrencies have become so popular that many of us have started connecting them with traditional banks reflexively.


In simple terms, a crypto bank is a platform that conducts traditional banking operations (loaning, money preservation, transfers, exchanges, etc.) with cryptocurrencies.


Decentralized Finance is a sphere of decentralized services related to defi development (that includes platforms, stocks, and crypto banks) conducting loaning and depositing on a blockchain basis. 


(Recommended reading: What is Cryptojacking and How to Prevent it?)


Traditional Banks vs Crypto Banks


Though both have some similarities, there are many essential differences between a traditional banking system and the crypto bank sphere. 


  1. Legal recognition 


The biggest difference between a traditional bank and a crypto bank lies in their legal base. Though countries like Switzerland have given a license to a crypto bank as well as the USA that makes it legal on a federal level. 


However, the majority of countries are still lacking any sort of concrete legislation regarding cryptocurrencies. There are some nations that even want to ban cryptocurrencies. 


On the other hand, the entire network of traditional banking is tightly connected with the government, starting from a package of laws and finishing with an institution of the Central Bank. 


This legal recognition comes with more safety. As traditional banking is able to protect the clients’ assets in a better way. But we cannot neglect the fact that this legislation makes it more complicated as well. 


This is because traditional banks are not as flexible and independent as crypto banks. However there are some exceptions, in some countries, people have access to foreign crypto services exceptionally.


  1. Scalability and scope 


The traditional banks count more, as a rule. They can conduct any operation with client’s money: depositing (with regular interest per cent payments), loans (small, instant, big, mortgages, etc.), currency exchanges, gold and precious metal exchange, disposal of finances, international and inner money transactions, and countless other significant operations and services.


While we see many crypto banks standing as investment funds suggesting people invest in cryptos. Just a minuscule number of cryptocurrency banks perform interest payments and loans. 


  1. Safety and insurance 


Another significant difference between a traditional bank and a crypto bank is regarding safety and insurance. 


Most of us consider traditional banks to be pretty safe. The simple reason is that the assets are insured and have proficient security systems. Even if a physical bank is robbed, a client does not lose money due to the robust framework of insurance and other bank offices of the current bank system.


On the other hand, cryptocurrencies function in a slightly different scenario. The wallet protection is up to the user's choice. If someone loses the information, it can be easily stolen. If someone loses a physical wallet (a memory card), they risk losing their currency. 


However, someone's currency cannot be stolen without a transaction thanks to the stable blockchain of popular currencies. (Reference)


  1. Human and knowledge resources 


The next major difference that is hard to ignore when we compare traditional banks and crypto banks is the immense power of human and knowledge resources. We all know that the traditional banking system has been developing for centuries, cryptocurrencies are just a product of the last 13 years. 


There is a massive workforce in every country working in the sphere of traditional banks. Crypto banks are existing, but they lack experts and specialists. 


However, the good news is that we can soon see traditional banks beginning to work with cryptocurrencies. There are a decent number of good financial analysts who work with cryptos that are emerging too. 


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Merits and Demerits reconsidered for Crypto and Traditional banks


Can we ever see crypto banks transforming into a full substitution for traditional banking? To answer this question, we need to have a quick look at the merits and demerits of both systems first.


Pros of traditional banks


  • Legal basis

  • A massive number of possible operations and flexibility in approach

  • Provides both physical and digital presence for users

  • A much better experience and lots of specialists


Cons of traditional banks 


  • Governmental connections make banks a lot more dependent on the government

  • Bank transactions are quite slow

  • It is an additional mediator between people conducting a transaction

  • Banks rule the money of a client. 


Pros of crypto banks


  • Blockchain technology is quite stable

  • Though the safety measures are different and complicated but are stringent 

  • Blockchains do not depend on the will of a single person for their functioning 

  • Blockchain technology involves a minimal number of mediators

  • Transactions within cryptocurrencies are undeniably swift and secure


Cons of Crypto banks 


  • Many governments still treat them as assets but not currencies

  • The legal basis for the crypto banks is more difficult to acquire

  • The crypto banks do not have as many possibilities as traditional banks

  • Few auxiliary services like insurance exist for blockchain. 

  • There are a few companies that manage to combine all the services needed for the bank imitation.


This has become evident that the struggle between crypto banks and traditional banks is quite complicated. Thus it becomes really tough to predict how crypto banks can become a full substitute for traditional banking. 


The relationship model as allies or systems that supplement each other is not easy as it appears. Though we agree that blockchain technology is a stable technology that is used in many banking services, the biggest problem with the majority of cryptocurrencies is their insecurity by fiat currencies (not applicable everywhere) or physical assets. (Source)


Though experts and crypto investors are bound to neglect this problem, this can be major trouble for the regular people who are not familiar with the entire system. This uncertainty poses another major obstacle for crypto banks. 


Thus we can encounter the imperfection of the cryptocurrency transactions conducted during purchases. This is what the Future of Cryptocurrency would look like. There are numerous examples of businesses accepting cryptocurrencies for goods and services. However, a company needs to pay salaries and taxes. 


For that, it must go to the cryptocurrency stock exchange, exchange the currency for fiat money and send them to the company’s bank account. This effectively demonstrates that cryptocurrency banks cannot function as a full bank substitution unless the government starts accepting cryptos as taxes. 



Ending Notes 


We see how Crypto banks are emerging as the latest trend in the financial sector. Though they are not similar to traditional banks, they do acquire new users every day. They also provide clients with simple options such as loans and storage. 


However, it is pertinent to acknowledge that in the competition between a traditional bank and a crypto bank,  the former is bound to win. This will continue unless the people and governments start treating cryptocurrencies as a full-fledged substitution for money. 


As the authors of “Blockchain Revolution,” Don & Alex Tapscott said,

“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”. 


It is a matter of time before we would be able to witness the merging of traditional banking and the sphere of crypto banking. 


It has been predicted that despite all the demerits of crypto banks, the phenomenal success of cryptocurrencies indicates that by leveraging deep blockchain and defi development experience, the situation will change in ten or slightly more years. The world will witness the merging of the entirely contrasting two variants of banking, leading to the rise of a new financial environment.

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