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What is a cryptocurrency bank?

The “crypt” in cryptocurrency refers to the computer code that both identifies and records an amount of digital money, the “currency” part of the word. Cryptocurrency, or “crypto” for short, is a digital form of money controlled by computer code instead of a central bank.

This is not as revolutionary an idea as it sounds. Traditional currency (also called “fiat money”) is also digitized. In fact, much of the fiat currency in the world is not actually bills and coins, but merely entries on a bank's computerized ledger. Sounds just like crypto, doesn't it?

The majority of currencies — such as dollars or euros or renminbi — and cryptocurrencies — such as bitcoin or ether or algo — exist in substantially the same form. They are ledger entries. The biggest difference is that deposits of traditional or fiat money are subject to the control of a central bank. And those deposits in the U.S. are insured by the FDIC, while cryptocurrency is not.

Another difference is that crypto is highly volatile. Some have lost half their value in recent months. Most major currencies do not fluctuate by more than a few percentage points in a year. And some analysts and even regulators think that cryptocurrencies are not a form of currency, but rather an asset.

What's the difference between traditional and crypto banking?

Traditional banking is focused on managing cash and credit at a bank, such as in a checking account, savings account or loan. Cryptocurrency banking refers to a financial technology (fintech) firm, bank or exchange that allows users to hold and manage digital assets. These banking services include holding a balance, making payments and even earning interest from holding one or more cryptocurrencies.

These crypto banks differ from a standalone wallet in that they offer federally insured bank accounts, prepaid debit cards and a cryptocurrency wallet. In addition, crypto banks are usually regulated.

Do banks invest in crypto?

Some banks may be investing in crypto but not to any degree that merits disclosure statements as of this writing. What banks are investing in is the infrastructure and electronic platforms that permit customers to buy and sell and earn interest on their crypto holdings.

JPMorgan Chase — whose CEO, Jamie Dimon, has been an outspoken critic of cryptos — was the first global bank to create a blockchain-based network for instantaneous payments. And now it has an entire unit devoted to blockchain projects.

Which banks allow you to buy and sell crypto?

The Office of the Comptroller of the Currency (OCC), a division of the U.S. Treasury, allows all U.S. banks to provide custody services for digital assets. This means that banks hold unique cryptographic codes associated with the private digital wallets of their customers.

And the central banks of England, China and the U.S., among others, have announced plans to explore the launch of their own digital currencies.

Many banks have announced that they host cryptocurrency accounts (i.e., they act as custodians for cryptocurrencies) and offer other services. Still others have prohibited or severely limited cryptos. Some of the banks in the U.S. that permit cryptocurrencies include:

Can I buy crypto through my bank?

If you bank at any of the banks listed above, the answer is yes.

If your bank is not on the list and you want to buy crypto through a bank, you have a few options.

  • Open an account at any of the places listed above.
  • Open an account at a crypto exchange like Coinbase or Gemini and link it to your regular bank account.
  • Use your PayPal or CashApp account to obtain and hold crypto.
  • Use a broker that specializes in crypto trading, like Sofi or Robinhood.

Banks that offer crypto rewards

Some banks also offer rewards for customers banking and holding crypto in their accounts.

Quontic Bank for example offers a bitcoin rewards checking account that is great if you want to get into bitcoin without risking your capital. You can get 1.5% in bitcoin when you make an eligible debit card purchase. You will pay a 2% fee to redeem the bitcoin into dollars, which is similar to other crypto platforms (some platform fees are even higher). Any cash in your account is FDIC insured up to $250,000.

Another platform that offers crypto rewards is Coinbase. With Coinbase you can earn crypto by watching educational videos and taking quizzes about cryptos. You essentially earn money by learning about various cryptos offered on the market, thereby expanding your mind and your portfolio. However, it's important to keep in mind that the cryptos in your account are not FDIC insured and the value in your account will change as your cryptos fluctuate in value. So if your wallet or the platform is hacked, or money is stolen, you are unlikely to recover it.

And these exchanges are also subject to new regulations. For example, the Security and Exchange Commission has said it intends to sue Coinbase for its Lend products, where users can earn interest for lending their crypto deposits. SEC Chairman Gary Gensler has taken the position that deposits of cryptocurrencies which offer depositors higher than market rates of interest are effectively securities and should be regulated. Depositors may be adversely affected by SEC actions aimed at regulating crypto markets.

Regardless of which platform you choose to deposit crypto in, carefully consider the volatility of cryptocurrency before you invest.

More: The best bitcoin and crypto sign-up bonuses

Pros and cons of investing in crypto through bank accounts

The major advantage of investing via your bank account is the convenience of having your assets in one place. There is also someone to call during a crisis.

The major disadvantage may be the fees. Each bank's fees are different so we can't make blanket statements. But generally, banks charge for custodial services on top of any transaction fees.

Coinbase charges a flat 1.49% fee for all transactions executed on its platform, subject to a minimum. And there is a minimum 0.5% spread between the bid and ask prices of most cryptos listed on the exchange. The spread varies and is likely to be more expensive during volatile times. Your bank may or may not add fees on top of this.

Some banks charge fees for selling bitcoin. Quontic charges 2%. There are no other fees at Quontic. But it offers the opportunity to earn free bitcoin via the use of its debit card. And the dollar portion of your deposits is FDIC insured.

What lies ahead for cryptocurrency banks?

As crypto becomes more mainstream two things are likely to occur. For one, there will be a shakeout from which a few of the 6,000 or so current cryptos will remain. And more banks will likely let customers buy and sell cryptocurrency, especially in conjunction with third-party fintech firms.

For example, Oklahoma-based Vast Bank recently let customers buy and hold digital assets. And the Black-owned neobank First Boulevard partnered with Visa to pilot a similar offering.

We believe that cryptocurrencies are here to stay, but that does not necessarily make them appropriate investments for your portfolio. Cryptos are volatile, so before you invest in them, make sure it makes sense for your portfolio.

About the Author

Steve Maslow

Steve Maslow

Freelance Contributor

Steve Maslow is a freelance contributor for Moneywise.

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