Bitcoin once promised that it would help realize the lofty goal of making individuals “their own bank.” To understand the many services that banks truly provide is also to realize how preposterous this claim was in 2008, when Bitcoin’s white paper made it. More than a decade later, the grandfather cryptocurrency is still on the peripheries of traditional finance, yet the decentralized industry that it has spawned can indeed replicate many financial services on the blockchain, all of which were formerly exclusively in the realm of banks.
Is DeFi banking?
Decentralized finance (DeFi) has quickly become a buzzword. By allowing people to connect to new decentralized lending, exchange, savings and other DeFi platforms, blockchain can provide a cryptocurrency alternative to traditional banking services, and those who are comfortable operating in this ecosystem are therefore able to wield their assets with greater fungibility. Make no mistake: DeFi is not banking, as it only mimics banking functions and is still unable to provide the other thing banks are valued for — i.e., security.
What’s a crypto bank?
Crypto banks are banking institutions that engage in the standard range of money-related activities like deposits and withdrawals, savings, lending and borrowing, and investing in a wider range of instruments and markets. While this also describes a standard bank perfectly, crypto banks have integrated cryptocurrency into these financial functions. They’ve also gained legality in the eyes of local financial watchdogs.
The challenge facing blockchain is twofold: It must be in a tolerating regulatory environment and have enough local talent to provide mature, trusted solutions. In places with progressive policymakers such as Germany, businesses and institutions holding fiat money and fiat-money-based assets can easily participate in the decentralized economy through a crypto bank. These kinds of crypto banks, such as Bitwala and Spot9, are essentially the skeleton of what will one day be a bridge between the segregated fiat and crypto economies, which is only now beginning to emerge.
Regulated by Germany’s Federal Financial Supervisory Authority, Bitwala deposits are insured by the German Deposit Guarantee Scheme up to 100,000 euros (about $113,000), just as they are for other banks regulated in Germany. Its partnership with European Union-regulated SolarisBank ensures that account holders are able to do with Bitwala the same as what they’d do with their regular bank account — i.e., get paid, pay rent and bills, exchange currencies, send interbank payments, and store money in both fiat and cryptocurrencies seamlessly.
A convincing yet futile facsimile
Due to the unique capabilities of blockchain finance, many of the largest centralized crypto firms are able to offer bank-like services for other enterprise-level businesses, even where regulations haven’t taken shape. In the United States, for example, the Securities and Exchange Commission hasn’t yet indicated that these businesses can integrate with the banking system, and for now, they’re essentially investment funds. Coinbase Custody is one of the most sophisticated examples, but it can only play being a “bank” until regulators give their approval.
Serious investors and businesses preferring to operate in full view of tax authorities and regulators will need to do the reporting legwork necessary to legally invest fiat into the tokens available on Coinbase Custody. It allows people with large investments in the crypto market to avail from segregated cold storage while enjoying seamless integration with the Coinbase Pro exchange, insurance for deposits, staking tools where available, customized reporting and third-party auditing.