Crypto-friendly banking: What should you know?

At first glance, cryptocurrency and traditional banking might not seem to have much in common. After all, cryptocurrencies were created to let people spend securely without needing a central government or traditional bank. But many banks are starting to integrate these digital assets into their services, allowing customers to buy, sell and hold crypto directly through their banking apps. This article explores how banking services are adapting to virtual currency.

Key Concepts:

• Crypto-friendly doesn't mean crypto bank: Just because a bank offers some crypto features doesn't mean it's a full-fledged "crypto bank."
• Services vary widely: Banks offer different levels of crypto-related services.
• Infrastructure matters: If you plan to use crypto frequently, you need to understand the specific services and infrastructure you'll need.

As banks adapt to emerging technologies, cryptocurrency is gaining increased attention. If you intend to use cryptocurrency, it's crucial to understand the specific services and infrastructure you might need from a banking institution.

What's a crypto-friendly bank or crypto bank?

Traditional banks primarily focus on services like deposit accounts, cash transactions, consumer loans, mortgages and credit cards. Some traditional banks now offer limited crypto-related services, such as letting you buy or sell a small selection of cryptocurrencies through a partner platform.

A crypto-friendly bank goes a step further by actively supporting crypto transactions and integration. This might include allowing you to purchase, transfer and exchange certain cryptocurrencies online; offering debit cards linked to crypto holdings; or partnering with custodians to hold your crypto. True crypto banks are still uncommon, and most operate in partnership with regulated exchanges or trust companies rather than holding the crypto themselves.

For example, if you wanted to buy Bitcoin or Ethereum through a crypto-friendly bank, you’d deposit traditional currency (like dollars) into your bank account, use the bank’s platform (often powered by a partner) to purchase the cryptocurrency, and have it stored in a wallet provided by that partner.

When it comes to spending crypto, understand how your crypto-friendly bank handles transactions. Some banks require you to sell the crypto first and then spend the proceeds. If the bank, or a partner of the bank, offers a debit card, in most cases, the crypto is converted into traditional currency at the time of purchase rather than sent directly to the retailer.

Before choosing between a traditional bank with limited crypto features and a dedicated crypto-friendly bank, understand how your holdings will be stored, accessed and used for spending. Also look at dedicated cryptocurrency exchanges, which often support a wider variety of crypto than either type of bank.

Can I add or deposit crypto funds into my bank account?

The process of adding or depositing crypto depends on the type of institution: a traditional bank, a crypto-friendly bank or a dedicated cryptocurrency exchange. It's also important to remember that you're not truly "depositing" crypto into a traditional bank account in the same way you would with cash.

• Traditional banks: In general, you cannot directly deposit cryptocurrency into a traditional bank account because these banks don’t typically handle cryptocurrency. However, some traditional banks may allow you to purchase a limited selection of cryptocurrencies through a partnership with an exchange. In this case, you're not depositing existing crypto, but rather buying new crypto through the bank's platform, and it's held by the partner exchange or custodian.
• Crypto-friendly banks: Crypto-friendly banks offer more options. You can typically purchase crypto through their platform using traditional currency from your bank account. They will then hold the crypto for you through a custodian. However, directly "depositing" crypto you already own from an external wallet may or may not be possible, depending on the specific bank's policies.
• Cryptocurrency exchanges: If you already own cryptocurrency, you would typically "deposit" it into your account at a dedicated cryptocurrency exchange. This involves transferring the crypto from your digital wallet to a designated address provided by the exchange.

Transferring funds out of crypto and into your bank account

Whether you started with a traditional bank, a crypto-friendly bank or a cryptocurrency exchange, the process of getting funds out of crypto and into your traditional bank account generally involves selling your cryptocurrency. When you sell cryptocurrency on an exchange or through a crypto-friendly bank's platform, the proceeds are credited to your account on that platform. You can then transfer the funds to your traditional bank account. The selling and withdrawal processes often occur simultaneously.

Important tax note: Selling cryptocurrency in the United States is generally considered a taxable event by the IRS. Consult with a qualified tax professional for personalized advice regarding your specific situation.

Should I use cryptocurrency for regular daily transactions?

In general, using cryptocurrency for everyday purchases may not be the most practical choice at this time. Cryptocurrencies are known for their price volatility. Bitcoin, the largest and most noteworthy crypto network, has seen its value rise or fall by more than 50% multiple times within a single year. A purchase made at one price could lose half its value in just a few months.

While some crypto enthusiasts may view price dips as opportunities for long-term investment, the focus here is on using crypto for daily expenses.

The main thing to think about is how much the changing value of cryptocurrency affects what you can buy with it. When prices of everyday things go up (from inflation), and the value of your crypto also goes up and down a lot, it can make things more expensive. For example, if your cryptocurrency becomes worth less compared to the dollar, you might have to spend a lot more of it to buy the same things you used to.

How safe is crypto banking?

The safety of crypto banking is a complex issue due to both market volatility and its unique security risks. It's crucial to understand that cryptocurrency holdings lack the same protections as traditional bank deposits.

Cash deposits in traditional bank accounts are protected by the Federal Deposit Insurance Corporation (FDIC) Opens in a New Window.‍ ‍ ^{See note 1} Share deposits in credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF) Opens in a New Window.‍ ‍ ^{See note 1} Both FDIC and NCUIF cover deposits up to $250,000 per depositor, per insured institution. These provide a safety net in the event of a bank or credit union failure.

Cryptocurrency holdings, however, are not FDIC or NCUSIF-insured. Whether held at a crypto-friendly bank or on an exchange, they are not subject to the same government-backed guarantees. This means that if the crypto-friendly bank or exchange fails, you could lose your crypto assets.

Additionally, cryptocurrency values are highly volatile, and these market fluctuations can result in significant losses. Unlike traditional currencies, cryptocurrency lacks a comprehensive consumer protection or insurance system to mitigate these market risks. And while the encryption and visible ledger systems employed by many exchanges can help prevent certain types of fraud, they don't eliminate all risks. You may lack protection against losses resulting from hacking or theft, although some exchanges may have their own insurance policies in place.

Protecting your own accounts is paramount. If your account is compromised due to your own negligence, for example, by using a weak password or failing to enable two-factor authentication, you will likely not be able to recover your assets. Some exchanges may offer limited reimbursement in cases where accounts are hacked due to a security breach on their end, but this is not guaranteed.

What’s next for crypto banking?

As cryptocurrency adoption continues to grow, the relationship between traditional banking and digital assets will likely become even more intertwined. Staying informed about the evolving landscape, understanding the risks and opportunities, and prioritizing security will be essential for navigating this dynamic financial frontier.