The Hot Term “Crypto Bank”: Bogus or Inevitable Milestone in the Global Financial System Development?
Switzerland, Lichtenstein, and Luxembourg are ahead of the whole world and persist in keeping their status of global financial innovation champions and reliable financial providers. DUKASCOIN, for instance, became the first crypto project launched by a traditional bank with all necessary licenses. Switzerland is now adapting its financial legislation to cryptocurrency transactions and institutions. Singapore and China are also keeping pace: cryptocurrencies have substantially reinforced their positions in Singapore in terms of legislation during 2020 – major bank DBS announced the launch of a crypto trading platform which will also enable the issue of digital tokens backed by assets and a custodian service for digital asset storage, meaning there is an intention to create a full-fledged crypto bank. The situation in China is also of interest: back in 2019 the authorities relented on cryptocurrencies and declared unfailing support for them. International experts perceive this as the Celestial Empire’s strategic intention to squeeze out the world hegemons – the US dollar and the Federal Reserve System and also tackle the long-standing issue of yuan nationalization. Naturally, all the transactions of this kind in both Asian countries are subject to rigorous government control and mandatory licensing of market participants.
But does everyone maintain those high standards nowadays? Definitely no. And the concept of “bank” itself is rather an “advance payment” baiting new customers because practically all existing crypto banks are still much lagging behind traditional financial institutions in all aspects, ranging from service portfolio to legitimacy and regulatory mechanisms. “Bank” sounds serious and inspires confidence while crypto banks in their essence are investment funds and ordinary cryptocurrency platforms offering only a portion of traditional functions: currency conversion, funds storage, monetization, acquiring, etc. Any platform, however, may itself what it wants today, provided that the jurisdiction permit.
Let’s consider real-world examples. Two companies, Sygnum and SEBA, were issued temporary licenses by Switzerland’s financial regulator Finma allowing them to carry out banking activities and transactions with securities. Until recently the cryptocurrency sector had trouble convincing the local regulator about its ability to integrate the crypto industry into traditional finances safely and reliably. Sygnum and SEBA groups proved this possible. Sygnum Bank even created its own digital payment token based on the Swiss franc which can be used for transactions on the Bank’s platform.
In the autumn of 2020, the USA also saw emerge the first crypto bank – Kraken Exchange was licensed by the State of Wyoming to set up a bank transacting in digital money. Clients can use crypto to invest, pay bills and receive salaries – only in the territory of the US now but there are plans to expand. At the beginning of 2021, Anchorage was established, the first federal-level cryptocurrency bank providing services in digital asset storage, including those for institutional investors.
As for Ukraine and Russia, crypto banks are reluctant to tap into the markets since the legal framework is still too immature for such activities. However, the proposal to issue a national token was put before the President of Ukraine, Prime Minister, and Minister for Digital Transformation.
As an expert, I am convinced that as of January 2021 all the companies calling themselves crypto banks rather constitute quasi-institutions yet not capable of assuming full-fledged functions of fiat money and traditional banks. Here is why:
- An e-wallet with its functionalities is quite sufficient for cryptocurrency transactions, and money conversion is available in the exchange; the status of the “bank” is not needed for these activities
- Settlement functions offered by banks will fade; yes, they will not perish completely but they will simply retain the function of funds storage and loan issue: so what is the use of chasing a status which is becoming obsolete?
- Few are willing to be involved in cryptocurrency projects, largely due to the lack of the legislative framework
- Crypto banks are not going to address the problem of payments because payment systems are also banks with greater limitations in terms of operations and AML/CFT
- As of today, the only jurisdiction enabling legal operations under a special cryptocurrency license is Japan; the license costs $300 thousand, and obtaining one is a complicated process
Those are just a few arguments to mention. Summing up, however, it is worth mentioning a trend: crypto projects and traditional banks are coming closer in 2021. Consider crypto inclusion into PayPal and wider integration of classic services into the crypto space: cards linked to cryptocurrencies, bill payment, deposits, and P2P transfers.
Optimization of financial relations between companies and individuals, minimum charges, and security – that is what will appeal to next-generation users. But regulators will have the final say: the activities of crypto banks would be permitted full-scale only with rigorous control of institutions and their transactions. So one should be prepared to forget about easy compliance- and document-free transfers from a nicknamed cryptocurrency wallet and other perks which are available today.
In the longer run, however, crypto banking will become an agent of financial services not only for cryptocurrency users but for the general public residing in remote areas and not having access to bank services. There are over 101 million crypto users worldwide now. Their number increased by 189% in the last two years. And this is just the beginning.