There is a fifth dimension beyond that which is known to traditional banking. It is a dimension as vast as space and timeless as infinity. It is the middle ground between custodial and non-custodial exchanges, between finance and decentralization, and it lies between the pit of your fears and the summit of your knowledge. This is the dimension of earning interest. It is an area we call the Twilight Zone the Crypto Banking space.
More and more people are turning away from modern banking and all the trouble it encompasses — the high fees, poor service providers, low-interest rates — for newer solutions that provide more value. In the last few years, the modern financial landscape has been shaken up by cryptocurrency, fintech, and NFTs, even garnering interest among traditional investors.
Crypto banks aren’t really all that different from traditional banks and credit unions, providing investors with a sense of familiarity. Like many newer financial institutions, there are no physical locations and the majority of banking services can be done through a mobile application.
Crypto banks have begun to pave the way for managing cryptocurrency through a safe, virtual financial institution — offering security, loans, debit card, credit cards, and the ability to earn interest on one’s crypto fairly easily. Platforms like BlockFi and Celsius have garnered popularity due to their unique, accessible approach to crypto banking.
Benefits of Crypto Banking
An Easy Way to Gain Exposure Into the Market
Unlike crypto wallets like MetaMask or online exchanges like SushiSwap, crypto banking is easy for anyone to use. That is because many people might be hearing about the crypto space, it is often difficult to get onboarded safely. There is also a healthy level of distrust in various cryptocurrency exchanges, leaving many would-be investors out of the cryptocurrency market.
A crypto bank is a credited virtual financial institution that helps beginners enter the space and easily store their crypto. This means that on crypto banks, you can even convert Fiat currency to coins like Bitcoin or Ethereum. For legal reasons, crypto banks will need to validate your identity using Know Your Customer verification, the same as any other kind of bank, and many other crypto services.
Buy, Trade and Store Crypto Easily
Unlike some other services and exchanges, once you buy your crypto you can deposit it into a savings account. While you do release custody over to the virtual bank, your money is kept safe.
While you won’t have the private keys to your cryptocurrency, it is nonetheless safely and securely stored by the custodian. A crypto bank retains custody of your crypto, using it to provide financial services to a select group of institutions, giving you the interest that is paid on these loans.
For example, Celsius will let you earn up to 17% on crypto that you might otherwise have sitting around.
In addition, these banks allow users to take out loans using their deposited savings as collateral. This is done instead of cashing out, allowing you to retain your deposit while generating cash liquidity. However, if the price of your crypto goes down then it may spell trouble if you’ve borrowed more than you can afford. Nonetheless, these loans avoid taxes while giving you the flexibility to spend this money elsewhere.
Alternatively, you may want to diversify your portfolio a little while into your investment. Some crypto banks will let you trade within the app itself. Some also have native tokens (like CEL) that are issued as rewards and confer benefits, like higher interest rates, to holders. Finally, some banks are starting to provide credit cards (Visa) that allow you to earn crypto rewards on your purchases.
Virtual Crypto Banks Vs. Fiat Banking
While most banks offer online services, few are completely online, requiring the dreaded visit to line up and sign transactions in person during business hours. Virtual crypto banks are lightning-fast and 24/7 due to this cool new thing called the internet. Having all the verification, forms, and banking online results in real-time savings. Additionally, virtual banks save on rent, allowing them to offer even higher returns on their products.
By being online, crypto banks offer you more control of what you do with your money. Many traditional banks require in-person signatures to move your money in and out of mutual funds. In addition, many financial advisors earn commission on the products they sell you.
I’m sorry, but unless your financial advisor arrives to work on a DeLorean, it is unlikely that their picks and products occur better than chance. Instead of sitting through these annoying pitches, you can easily open a savings account to deposit crypto and earn up to 17% interest yearly. In contrast, most U.S. banks don’t even let you earn substantial interest in your savings or checking account.
Risks of Virtual Crypto Banking
Like many other things in life, crypto banking comes with some risks — though nothing like what you may have “allegedly” partaken in during college. Cryptocurrency comes with a private key that tells the blockchain technology that you own a certain amount of a token.
When you buy crypto and move it to a private digital wallet, you take the private keys and proof of ownership into your own hands. Since virtual banks lend out your crypto, they are a custodial type of exchange where they retain custody of your private keys. Take the same precautions you take with other, more traditional lenders.
According to their website, BlockFi has not incurred any losses. Since the digital assets they hold are not considered securities, they cannot be insured directly by the third-party companies that provide cold storage for the major crypto banks. The SEC is looking into it but hasn’t been able to provide any clarity.
In the United States, BlockFi was issued cease-and-desist orders in four separate states, accusing the company of masking securities as high-yield savings accounts. This so-called deception is central in some of the cases against BlockFi, arguing that there is an inherent risk with the accounts making them securities. These early cases may shape the regulatory landscape of virtual crypto banks in the United States for years to come.
Celsius on the other hand chose to list itself as a security from the beginning, and the SEC is still looking for ways to come after them.
NOTE – Crypto Banks are not regulated by the SEC as of the time this was written, but they almost certainly will be. They will have their own version of the FDIC, and unique regulators that monitor them.
Two Virtual Banks Lead the Pack in 2022
BlockFi and Celsius tower over the competition. These two powerhouses are like the Roger Federer and Rafael Nadal of virtual crypto banking. Celsius has the edge outside of the US while BlockFi may offer some better perks within the US.
While there are some up-and-coming financial services, these two banks come out on top, time and time again. We recommend using one of these two services as their reputation will mitigate some of the financial risk. Both of these virtual banks are intuitive and easy to use but differ in details. Investors looking to mitigate risk and diversify their portfolios might opt for using both banks.
BlockFi vs Celsius
Supported Digital Currencies
While both services feature Bitcoin and Ethereum savings accounts, BlockFi supports substantially fewer cryptocurrencies than Celsius. As of August 2021, BlockFi supports 13 cryptocurrencies while Celsius boasts more than 35 cryptocurrencies including more diversity in stablecoins.
Celsius offers better rates and provides the opportunity to increase yield by holding the bank’s native token, CEL.
Buying and Trading
While BlockFi allows users to purchase cryptocurrency via US dollar (USD) wire transfers, Celsius accepts dozens of Fiat cryptocurrencies. Celsius offers a more transparent breakdown of their crypto trading fees on their site while BlockFi charges a spread on each trade (i.e. it may cost 1.5% more, allowing BlockFi to make commission). Additionally, Celsius does not have withdrawal fees, giving it an edge over BlockFi.
Other Perks and Features
Celsius offers their native cryptocurrency (CEL) as well as a payment platform with perks for users. However, users in the United States are unable to receive benefits from holding the CEL token, because it is not publicly available to US residents. This might be because of the murky rules around securities in the US, where it is unclear if crypto savings accounts count as a security offering. In other areas of the world, Celsius doesn’t fall afoul of that regulation. At least as of this writing.
Celsius also makes it easy to get a loan, using your existing cryptocurrency balance as collateral. Like traditional loans, your interest rate will depend on the amount of collateral put up, with more collateral securing a better rate. 1% is considered a gold-standard interest rate for your loan. However, while you’re taking out this loan, you won’t earn any interest on the crypto that you’ve put up as collateral. You can use this as a workaround to taxes, taking out the Fiat loans on your crypto.
Meanwhile, BlockFi offers one of the world’s first credit cards with Bitcoin rewards. BlockFi also lets you collateralize your crypto to take out a loan, but the interest-only goes as low as 4.5%, much higher than the offerings at Celsius.
Here’s a comparison. Note that the rates change frequently and you’re better off going directly to the source to find out what they are offering today.
|BTC, ETH, CEL, SNX, MATIC, DOT, BNT, AAVE, DASH, COMP, BCH, EOS, LTC, BAT, XLM, ETC, LINK, XRP, UNI, BSV, ZEC, ZRX, UMA, OMG, KNC, MANA, TUSD, GUSD, PAX, USDC, MCDAI, USDT ERC-20, TGBP, TAUD, THKD, TCAD, BUSD, ZUSD, PAXG
|BTC, ETH, LTC, LINK, USDC, GUSD, PAX, PAXG, USDT, BUSD, DAI, UNI, BAT
|Custodian Fireblocks has insurance on unlent crypto assets
|None on crypto deposits
|Fiat Transfer Fees
|0.7% – 1.5% spread
|Credit Card fees:
3.5% or $10 minimum fee;
2.99 for EEA and UK residents
|Loan origination fee: 2%
|Interest account withdrawal fees:
Bitcoin: 0.00075 BTC
Ethereum: 0.02 ETH
Litecoin: 0.0025 LTC
|$1 USD minimum; $600,000 USD limit per 24 hours
|7-day Withdrawal Limit
Varies by crypto:
Up to $5,000 USD via direct bank withdrawal.
|As low as 1.0% interest with 25% LTV
|As low as 4.5% interest with 20% LTV
|CEL token perks only available outside of US
|BlockFi credit card to earn interest in BTC
Crypto banks provide custodial storage and asset management to crypto hodlers. This means that they take control of the crypto assets that customers store with them and offer a decent amount of interest in return.
Crypto savings accounts pay high interest and weekly rewards on different cryptocurrencies at different rates
Crypto loans provide liquidity without requiring you to cash out or sell your crypto.
In addition, crypto loans can help you save on capital gains come tax time.
The elephant in the room (risk) is that although these banks are legit and have solid leadership and good security there is a lack of clarity from the SEC on most things crypto.
The risk of using a crypto bank is not rug pulls, hacks or an owner faking his own death and disappearing along with your entire account balance. The concern is the SEC. Nobody seems to know what the regulations are and they do not seem to be able to provide clarity. At some point, this will resolve, but how this affects crypto bank accounts is unclear. By today’s financial regulations and standards, they are legit and operate successfully in many countries and states.
We trust Celsius but not with everything. Everyone’s risk tolerance is different so please do your own research. You can also earn a decent return by staking SOL or ATOM in your Exodus wallet too.