Crypto Banking Creates New Opportunities for Consumers—and Some New Risks

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Crypto Banking Creates New Opportunities for Consumers—and Some New Risks

Since the epidemic started, consumer interest in cryptocurrency has skyrocketed. According to a CNBC study, 11% of consumers aged 18 to 34 utilized stimulus funds to invest in crypto assets. 1

Part of the reason for this is that cryptocurrency exchanges and other platforms are providing financial solutions that compete with – and even beat – conventional banking and lending. However, while you can deposit certain digital assets in a savings account and earn up to 10% on the balance, or use your crypto to secure a loan without a credit check, lawmakers and regulators are concerned about the lack of stability and consumer protections provided by the traditional financial services industry.

Key Takeaways

  • Cryptocurrencies are digital assets that may be used as speculative investments or to purchase and sell goods and services in certain situations.
  • Crypto platforms provide high-yield savings accounts with interest rates much beyond those of regular savings accounts, as well as secured loans with no credit check.
  • While these financial products are enticing, particularly to unbanked and low-credit customers, regulators and lawmakers are concerned about the lack of stability and consumer safeguards that surround them.

New Opportunities for Consumers Who Have Been Locked Out

Cryptocurrencies have existed since the introduction of bitcoin in 2009. Thousands more cryptocurrencies have evolved since then, some with particular goals but not necessarily.

These digital assets provide consumers a degree of anonymity and security that regular payment systems do not. As cryptocurrency has grown in popularity, exchanges and other platforms have emerged to provide new financial products and services.

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Many firms, for example, provide the opportunity to earn interest on your digital assets, akin to a high-yield savings account. However, instead of paying a fraction of a percent in interest, some companies are providing up to 10% on specific digital assets.

Moreover, several cryptocurrency platforms provide crypto-backed loans, which let you can utilize your portfolio as collateral to receive a loan, similar to securities-based lending. Interest rates are often in the single digits, and there is no credit check necessary.

In both cases, crypto platforms provided chances to those who had previously been denied access to certain financial services. If you have poor credit, it will be difficult to acquire a low-interest conventional personal loan, and most banks and credit unions provide pitiful rates on deposit accounts.

Furthermore, according to the Federal Deposit Insurance Corporation (FDIC),2 around 7.1 million families in the United States are unbanked, and crypto savings accounts do not have the same criteria to open as regular bank accounts.

Lack of Stability and Consumer Protections Put Crypto Users at Risk

While the financial services provided by crypto platforms may seem tempting when compared to their conventional equivalents, there are major dangers that customers are facing with these products that they may be unaware of.

To begin, although cryptocurrencies have grown in popularity over the years, they continue to be incredibly volatile. If you take out a crypto-backed loan and the value of your assets falls dramatically, you will risk a margin call. In this case, you must either make an extra deposit or allow the provider to liquidate part of your assets to offset the loss. And, since you’re borrowing money, you’re unlikely to be able to make that further deposit, thus you may wind up losing assets.

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Some crypto experts claim that stablecoins are the solution since they are linked to an external source, such as the US dollar. Even yet, assets like Tether have come under scrutiny for not having enough fiat currency reserves to back them 100%.

Earning a high income on your investments with crypto interest accounts might also be appealing. However, your funds are not guaranteed as they would be in a regular bank or investment account if the site supplying the account or the cryptocurrency itself collapses.

Finally, despite their greater security, crypto networks are still susceptible to hacking and fraud, and there aren’t enough rules in place to safeguard customers in these situations.

Regulations and Traditional Bank Involvement Are on the Horizon

At the same time that conventional banks are requesting that authorities slow down their crypto rivals, they are simultaneously investing in cryptocurrencies. They see the value of digital assets, as well as the potential for large profits.

Visa and Mastercard have both declared intentions to integrate cryptocurrency into their networks, and big banks from all over the globe have invested hundreds of millions of dollars in blockchain startups. 3 According to Investopedia, some lenders are also beginning to offer cryptocurrency rewards credit cards.

Traditional financial institutions are expected to continue using blockchain technology and cryptocurrencies into their goods and services. However, crypto aficionados should be prepared for government restrictions that will, ideally, give greater stability and protection—while perhaps limiting some of the advantages they presently enjoy.

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