How to explain crypto (Part 4 of 7): crypto banking

If you’re wondering how to explain crypto to your parents– or any older relatives– you may have realized how challenging of a task it really is. After all, crypto still isn’t embraced by the mainstream. It’s seen as a somewhat niche subject that only techy people can understand. 

That’s the purpose behind this series: to learn how to explain crypto in a way anyone can understand, but particularly older generations who weren’t raised in the digital age.

Previously in the series, we looked at the first use case for crypto: investing. But there’s more you can do with crypto besides keeping it as an investment. In this post, we’ll explore a fast-growing industry in the crypto world: crypto banking.

How to explain crypto banking 

Crypto banks are essentially any financial company that offers cryptocurrency financial services. After purchasing your crypto from an exchange, you might consider opening up an account with a crypto bank so that you can do more with your crypto besides just holding it as an investment.

When you’re figuring out how to explain crypto banking to your parents, it’s important to make sure they understand that there are essentially two types of crypto banks. 

These include financial tech companies purely dedicated to crypto and traditional banking institutions expanding their services to include cryptocurrency.

Crypto banks dedicated purely to crypto function similarly to traditional banks, despite technically not being banks. This is because they don’t fall under the authority of a central bank or regulatory authority.

Crypto banks offer services such as checking accounts, loans, debit cards, and savings accounts (often with much higher APYs than regular banks!)

On the other hand, crypto banking also includes traditional banks that support crypto. Traditional banks may not provide as many crypto financial services as dedicated crypto banks. Still, a growing number of them are starting to include crypto services to meet the rising demand for these types of services. 

Crypto banking is a growing industry, and the services, rewards, and fees vary across banks.

What services do crypto banks offer?

Checking accounts and debit cards

Opening a checking account through a crypto bank allows users a faster, more convenient way to use their crypto in their day-to-day transactions. In addition to a simplified user experience, you can access different crypto services, like rewards and crypto debit cards.

Crypto debit cards work by having the user preload their crypto onto the card through the bank’s website or mobile app. Then, the bank will convert that crypto to fiat currency either once money is transferred or whenever a transaction is made.

Crypto banks partner with Visa and Mastercard to offer crypto debit cards. This helps customers use their crypto more easily in their everyday lives since they can spend it anywhere that accepts Visa and Mastercard. It also allows them to withdraw funds from ATMs.

Different crypto banks might also offer rewards with their crypto debit cards, such as cashback in the form of crypto on purchases. Cards will also vary with the fees they charge, such as ATM or activation fees.

Savings accounts 

Another feature of crypto banks you should include when you’re learning how to explain crypto banking is savings accounts, which lets users earn interest on their crypto.

Crypto savings accounts work similarly to regular savings accounts. The crypto bank takes your crypto and loans it out to other customers or investors, and gives you interest in return.

Crypto savings accounts often have much higher APYs than traditional banks– as much as 8% to 12%, depending on the bank and which crypto you own. 

However, while that sounds like a good deal, you should keep in mind that crypto’s price volatility, market demand, and any account fees will affect how much you earn.

Loans and other services

Lastly, crypto banks provide access to financial services to those who otherwise wouldn’t be able to get them.

This includes borrowing against your crypto to take out a loan. Crypto-backed loans usually come with fewer requirements than fiat-backed loans, so you don’t have to worry about qualifying if you have a bad credit history, for example.

Other financial services include crypto IRAs and Roth crypto IRAs. These function similar to regular IRAs, but are classified as a self-directed IRA (SDIRAs). SDIRAs give you the ability to invest in alternative assets, which you might not be able to do with regular IRAs.

Other services offered by crypto banks include linking your Coinbase account with your bank account so that you can keep your account balances and transactions in one place, and the ability to buy, sell, and hold crypto directly.

Risks of crypto banking

Of course, if you’re struggling with how to explain crypto banking to your parents, you should be prepared to address the risks. 

First, crypto’s price volatility can impact how you buy, sell, and earn interest with your crypto. Just because you hold crypto in your bank account does not make it immune from these price changes.

Another factor to keep in mind is that, unlike traditional banks, the crypto in your bank account is not insured by the Federal Deposit Insurance Corp. While some crypto banks are beginning to include insurance, many still don’t, so this could affect you if the crypto bank you’re using ends up going out of business. 

Lastly, the federal government is looking to bring regulation to the crypto banking industry, which could impact the industry as a whole. While some regulations could encourage more people to use crypto banks, they could also potentially disrupt the industry’s growth.

Future of crypto banking

2024 will likely be a big year for the crypto banking industry.  

And more mainstream financial institutions are looking to join the crypto space. This has led to some partnerships between traditional banks and crypto companies. For example, USAA and Ally Bank offer their customers a direct connection to their Coinbase accounts.

Regulation is also likely to hit the U.S. crypto banking industry soon. The Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency put out a statement in late 2021 indicating that they are looking to create regulations in 2022 regarding what crypto services traditional banks can provide. 

What use case will be next?

As cryptocurrency continues to gain popularity, crypto banking will grow right along with it. The fact that many traditional banks are jumping on the crypto bandwagon is a good sign for crypto newbies, particularly older generations, looking to get started with crypto through the institutions they’re already familiar with. 

But besides investing and banking, what are crypto’s other use cases? In the next post, we’ll take a look at how to explain crypto lending to your parents.