What are crypto banks? – The Cryptonomist

Not all banks are the same, not even traditional banks: in fact, there are some that can be called crypto banks, meaning they are close to the cryptocurrency world in some way. 

However, at least three different types of crypto banks can be clearly distinguished. 

Crypto-friendly banks

The first type of crypto bank is the simplest imaginable: a traditional bank that tolerates and gives no trouble to those operating in crypto markets. 

This is by no means a given, because, instead, there are many traditional banks that are hostile toward customers who also operate in crypto markets. 

To be truly crypto-friendly, a bank must explicitly accept that its customers can freely trade in crypto markets. 

In this case, the benchmark example is PayPal. 

While PayPal is not a traditional bank, it is still an institution that holds banking licenses and until recently did not appear to be crypto-friendly. 

Indeed, it explicitly prohibited its customers from trading in crypto markets using their PayPal accounts, under penalty of having their accounts blocked. 

However, in 2020 the company opted for a real U-turn, suddenly becoming crypto-friendly. In fact, it even went so far as to integrate cryptocurrency buying and selling services, even though these were not strictly necessary to qualify as crypto-friendly. 

To be fair, most traditional banks still do not turn out to be explicitly crypto-friendly, but more and more are tolerating their accounts being used, for example, for deposits and withdrawals of fiat currency from crypto exchanges. 

True crypto banks

The next step would be to become a real crypto bank, that is, one that also offers crypto services to its customers. 

The prime example is always PayPal, which first integrated cryptocurrency buying and selling services, and then even crypto deposits and withdrawals. However, these are services that it has so far made available only in the US and UK. 

There are still very few real crypto banks in the world, so much so that there are several states where there are none yet. 

However, it should be pointed out that in order to offer crypto services, traditional banks have to form partnerships with crypto companies, such as exchanges, because they are not yet able to handle cryptocurrency-related services in-house. 

Having to rely on outside companies, they have a bit of a hard time finding ones that are secure and reliable enough to meet the very strict traditional banking standards. 

Therefore, it should come as no surprise at all that real crypto banks can still be counted on the fingers of one hand, state by state, and probably from this point of view the breakthrough can only be there when companies born and developed within the banking system itself provide such services. 

The important thing is that only real crypto banks will have the power to really bring the cryptocurrency revolution within the mainstream financial system, since they are still the core of it for all intents and purposes, especially for ordinary citizens and businesses. 

It is possible that it may still be several years before this kind of revolution can take place. 

Fintech banks

There is, however, a kind of intermediate level between traditional banks that are only crypto-friendly, and those that are already also true crypto banks. 

These are the fintech banks, which are often also crypto-friendly. 

PayPal is also a fintech company, but the benchmark for fintech banks is probably Revolut. 

These are banks that are very similar to traditional banks but have only recently sprung up, and they base their business primarily, if not exclusively, on online platforms. 

In most cases they are banks that are operated through smartphone apps, and in fact are innovative technology companies in their own right. 

Hardly this type of bank can fail to be crypto-friendly, but they do not always go so far as to offer crypto services as well. Revolut for example does, and not just in the US and UK, and has been doing so for some time now. 

Fintech banks are the ones that are most pushing the industry to evolve, because with their predominantly online business they are able to have a competitive advantage that actually forces traditional banks to evolve. 

It is generally inconvenient for a fintech bank not to be crypto-friendly, because they cater to a target audience that is often interested in crypto markets. 

Indeed, by offering crypto services as well, they become even more competitive, so much so that it is likely that somewhat all fintech banks will end up offering them. 

Since they are not traditional banks, however, many of their users are at the same time also customers of traditional banks, especially in more developed countries. 

In contrast, in developing countries there are many citizens who do not have an account with a traditional bank but perhaps are customers of fintech banking apps. 

Crypto exchanges

The ultimate in crypto banking are crypto platforms that add banking services. 

To date, there do not yet appear to be any major crypto exchanges that offer true banking services, but there are some that are definitely evolving in this direction. 

In particular mention must be made of the American Kraken and Coinbase, although they have not yet finished their process of conversion from simple unregulated crypto exchanges to fully regulated financial institutions that also offer real banking services. 

The fact is that if traditional banks do not want to get competition from crypto exchanges that are evolving into full-fledged banking institutions, they have to be quick to integrate crypto services for their customers. 

Only, as reported earlier, this is not at all easy, as it is difficult to find reliable partners who meet all the strict requirements of banking regulations.

So perhaps it is easier for a crypto exchange to become a bank than the other way around. Although it is actually very difficult for a crypto exchange to succeed in meeting all the requirements to become a full-fledged banking institution, more than one could eventually succeed. 

In that case it would have no small competitive advantage, since it could provide almost all crypto services while complying with all the strict regulations imposed on traditional financial institutions.