Why Crypto Banks are essential for Adoption of Bitcoin & Co
A crypto bank is not a contradiction but an enabler for making crypto assets mainstream and crossing the chasm of new technologies
Last year the Swiss Financial Market Supervisory Authority granted full Swiss banking licenses to two crypto projects. These “crypto banks” (one of them is Sygnum which I am a part of) were the first in the world to be regulatory compliant to offer traditional banking services such as brokerage, custody, lending, and assets management in the digital assets space. This being a historic decision for crypto and a sign that more and more lawmakers recognize the transformational nature of blockchain technology; that will create added value in countless applications in the financial services world and beyond. Just recently Kraken one of the world’s largest crypto exchanges based in San Francisco, became the first-ever cryptocurrency business in the United States to become a bank. Even though the number of regulated players increases from the outside (and especially the inside) of the crypto space it could seem that a crypto bank is a contradiction in itself.
If we look back in the history of crypto and blockchain technology everything (excluding the building blocks) originated from the mother of all cryptocurrencies Bitcoin. The first document ever published on Bitcoin, the Bitcoin whitepaper had the following title: Bitcoin: A Peer-to-Peer Electronic Cash System. So, what was the revolutionary aspect of Bitcoin? Money anyways is primarily in electronic form today and cash systems also existed before.
The revolutionary element of Bitcoin was the characteristic of enabling tamper-proof peer-to-peer transactions that made intermediaries obsolete.
While we still do not know who is behind the pseudonym Satoshi Nakamoto, Bitcoins infamous creator(s), we know for sure that Bitcoin was a proposed answer to the financial crisis of 2008. The crisis exposed the shortcomings of the financial services industry and demonstrated that many people can be affected by the wrongdoings of a few large financial intermediaries such as banks. Satoshi’s approach, therefore, was to create a peer-to-peer system without the need for centralized intermediaries that caused the crisis.
In the financial services world, the most obvious intermediaries are banks.
Their traditional business model is to use the money deposited by customers to lend out to others and pay a part of the generated interest back to the account holders. If we look at the booming DeFi space, we do not need a bank anymore for such services. There are many applications that allow lending and borrowing peer-to-peer with a fraction of the costs and a level of transparency no bank could compete with. Payments being another area that is traditionally a banking service but can be replaced by countless blockchain applications that are faster, cheaper, and more transparent.
So, if crypto and blockchain were to replace out-of-date banks why do we need a crypto bank? Why have a centralized intermediary for a decentralized asset class?
Of course, I could answer that these applications are still stuck in their children’s shoes, could contain potential errors in the code to be exploited, being declared illegal by governments or the founders stealing all the funds. But for me, the answer is coming from another point of view.
I believe that crypto banks will lead and accelerate crypto assets to mass adoption by making them bankable with the result that crypto will become easy to use and regulatory compliant. This is important as crypto assets are currently at the chasm of new technologies based on the famous technology adoption lifecycle graph.
The Technology Adoption Lifecycle
The technology adoption lifecycle graph divides the users of a new technology/innovation into five distinct groups. Each group adapts to a new technology based on their specific characteristics. In the case of Bitcoin, the first group the so-called innovators were the people who invested in Bitcoin between 2009–2013 characterized by tech-savviness and a high-risk tolerance. Followed by the early adopters from 2014–2020 that are described as visionaries seeing the future potential of a new technology such as the blockchain and who were willing to deal with teething issues and beta versions of products, even if they are not convenient.
The most important group to reach for a new technology is the early majority as this means a technology has reached mass adoption and is used by 49% of the market and is therefore mainstream. These are the people who are pragmatists and are driven by practicality. If something brings added value and is easy to use, they will start adopting it based on the experiences of the previous two groups. The gap between the early adopters and the early majority is called the chasm. Overcoming the chasm is the critical point for every new technology as it decides if it will change the world or only be used by a minority of the population.
This is exactly where crypto banks such as Sygnum come in and bring the added value for the whole crypto and traditional assets space.
As they offer two main value propositions that are essential for crypto’s mass adoption: convenience and regulation.
These two factors will make the early majority enter the digital assets space with full trust. In the following two paragraphs I will elaborate more on each of these two points and why a crypto bank will increase the adoption of Bitcoin & Co.
Let’s be honest, although it has become a lot easier to get into crypto compared to some years ago it is still very user-unfriendly and requires a lot of time. I remember setting up my first hardware wallet and buying my first Bitcoin on an exchange as a very unpleasant experience always fearing I am doing something wrong and my investments will be lost. Even later, being in the crypto space for some years, using certain exchanges or DeFi applications for the first time made me feel like a rookie again where I needed several hours to understand how the platform works as the UI/UX was not really user-friendly.
What the innovators and early adopters have in common is that they are either tech-savvy or curious enough to make the effort to learn how to get into crypto and use it in a safe way. This cannot be expected for the early majority that is driven by practicality. If we want them to use crypto it must be as easy as possible. It should be as simple as using a bank account.
Crypto banks allow you to have your crypto assets and your traditional assets (fiat currencies, securities and more) in one account. This may sound nothing special for an outsider of crypto, but it is a massive game-changer. Most people who are into crypto (like me) must deal with multiple third parties. You probably have some crypto assets on multiple exchanges as no exchange offers them all, then you will also have a hardware wallet such as a Ledger or Trezor device, further you are using a service such as BlockFi which generates interest on your deposits and maybe you’ve already interacted with popular DeFi applications. Of course, we should also not forget about your fiat bank account which you need to send funds to another party to purchase crypto assets and send your revenues back when selling crypto.
In the end, you are all over the place with your assets and data having multiple counterparty risks.
Crypto banks offer you to have all your different crypto holdings and fiat currencies convenient in one bank account dealing with one service provider. At Sygnum you have your cryptocurrencies (BTC, ETH, XRP, BCH, XTZ), fiat currencies (USD, EUR, CHF, SGD), stablecoin (DCHF), credit & lending services, asset management services and soon tokenized shares in one account. Furthermore, crypto banks have and are developing many new services and products that can also be used via the same platform. While distributed ledgers are good, distributed control is bad.
I remember at my first seminar about Bitcoin the lecturer told us to be careful about which address we send the coins as if there would be an error there is no customer service for Bitcoin to call. This is not the case with a crypto bank. At Sygnum, larger transactions get checked by the client’s team before being executed, contacting the client in some cases to make sure the transaction is correct.
In case of a client’s death, even if all instructions are prepared, one cannot expect his spouse to access the crypto holdings and manage them correctly.
With a crypto bank, one can be sure that his relatives will be informed about the crypto holdings (the bank is legally obliged to) and get access to them easily and professionally. Crypto banks make the access of crypto holdings for relatives convenient in situations where the holder is unable to or deceased. There are estimates of millions of dollars’ worth of crypto being lost forever as there were no mechanisms in place for relatives to access the assets in the past. This is a big value proposition for people who own or want to invest larger amounts in crypto as doing it with a bank assures that the access to the assets is not lost.
Another big topic in crypto is taxes. How do you tax your crypto holdings correctly? In most cases, there is no tax form generated from exchanges or a hardware wallet. This leaves the holder with two choices either not to declare the crypto holdings at all with the risk to receive a huge fine and juridically problems or painfully summarizing all transactions for the relevant tax period. Crypto banks like traditional banks automatically generate tax forms at the end of the year and conveniently allow you to pay your taxes without the painful task of manually declaring them.
No need for mattresses anymore
Security is another major issue with crypto investments. There is a lot of headaches involved when you hold a larger investment in crypto or your early investment turned into a +100k fiat equivalent. How should you store the assets secure but still conveniently accessible? Many people I know who hold larger amounts of crypto have it on hidden hardware wallets.
This is the modern equivalent of having your money under the mattress or a safe in your house.
Additionally, some deposit the hardware wallets in bank saves. If you already have your coins in the bank why not have it in a bank that integrates it into your bank account? Sygnum, for example, has the custody of their cryptos in a joint venture with Swisscom, Switzerland’s largest telecom provider, which stores the crypto in segregates wallets in Swiss Tier-4 data centers offering military grade security levels. No headache anymore of losing your private keys.
All the above-mentioned points can be summarized in an improved user interface and user experience enabled by crypto banks. As mentioned, the mass market can only be attracted and the chasm overcome by offering a product and service which is easy and convenient to interact with. The benefits of having a bank specialized in crypto assets and developing good UI/UX is that other institutional players such as traditional banks can connect to their APIs and offer their customers a pleasant experience without the need to build up in-house expertise initially. Further, even though many DeFi applications are very promising many lack a good UI/UX, one could imagine in the future crypto banks to connect to such DApps and make them widely usable by creating an user-friendly interface to interact with.
The crypto space used to be and in some places is still like the wild west. Although this may sound like a romantic place without bureaucracy and authorities enforcing rules; it is not. When we look back at the ICO boom in 2017 with approximately 80% scam projects and millions of dollars stolen due to no investor protection, one may ask what is so great about an unregulated crypto space? Regulation is not the same as censorship or discrimination as some proponents in the crypto community claim.
It may seem again contradictory that something that was designed to be outside the system is being integrated into it by lawmakers creating laws. But this is the most obvious sign that crypto is something to take seriously and something that is going to stay for a long time. That would be without a regulatory framework around it impossible. It is a clear statement by regulators around the world by issuing banking licenses to crypto companies demonstrating that if done compliant crypto assets are welcome in the financial world and beyond opening the door for mass adoption.
Crypto banks such as Sygnum can offer services and products that other players without the license cannot but also have a regulator in this case the Swiss Financial Market Supervisory Authority who checks if everything is compliant and are subject to multiple audits by Big 4 auditors. These are not companies where the team is unknown, and can basically do whatever they want and disappear if something goes wrong. Crypto banks have publicly known offices with dozens of employees with a known board and leadership that is legally accountable if something illegal happens. This makes the crypto space tangible and increases consumer protection and trust.
Most large players currently stay out of crypto such as pension funds, traditional hedge funds, or family offices.
One of the main reasons is the lack of regulated and trusted partners to work with.
Crypto banks are the perfect partner to help pension funds and other large players to enter the crypto space and make large investments into Bitcoin & Co and securely storing the assets with a full banking grade service offering. Often, the funds themselves want to invest in crypto but their investors are afraid due to the risk. But if a fund can partner up with a regulated Swiss bank, for example, this can change the opinion of important stakeholders. This will increase the adoption of crypto immensely as the mass market often follows the big players.
KYC & AML
Like a traditional bank crypto banks are regulatory obliged to do KYC & AML checks before onboarding a client or starting a partnership with another company. Crypto received a bad reputation in the past for being ideal for money laundering and illicit activities due to lack of KYC & AML. If the number of crypto banks and their operations scale the crypto space will be flooded with users that have done a proper KYC & AML process and keep bad players out of the space which brings added value to everybody.
Sygnum for example has developed the C-AML tool which makes anti-money laundering checks for crypto assets easy and convenient by allowing automated screening of transactions. The tool covers off-chain as well as on-chain analysis while fulfilling the regulatory requirements. Besides being used internally the tool is also offered as a service to third parties that would like to use banking grade AML checks for digital assets. This sharing of know-how allows more players to enter the space in a regulated way.
In the end, all the above-mentioned points can be summarized in an increased consumer protection. If an interested person knows that he can enter the crypto space via a regulated and therefore liable partner the probability is much higher to get into crypto than if there are no such options. While the innovators out of their tech enthusiasts and the early adopters due to their assessment of the future potential did not primarily care if the service they were using is being audited or not this will be expected by the early majority. Having more and more regulation and clearance will increase the attractiveness of crypto assets and make the asset class more secure. In the end this can further be summarized in trust creation due to regulation.
The above-mentioned points showcase that the main benefits of a crypto bank such as Sygnum and others are convenience due to banking grade UI/UX for crypto assets and regulatory security and compliance that creates trust. Getting institutions and other financial service providers into the crypto space will increase and accelerate the adoption of Bitcoin & Co in a healthy, steady, and regulated manner contrary to the speculative and short-lived 2017 bubble. This helps to overcome the chasm of new innovations and opens the mass market for crypto assets.
Although the beauty of crypto is that you can hold and control your own private key and therefore the access to your coins; many people prefer to not do it themself and there is nothing wrong with it. Like fiat currencies one could buy a safe instead of using a bank. But most people prefer the convenience and service of banks rather than doing it themselves.
Being able to store your cryptos safely with a crypto specialized player such as a bank is a much more convenient way than storing them on a crypto hardware wallet or an exchange. This brings the best of both worlds: possessing crypto but with the easiness and service range of a regulated bank.
One of the old mantras of Bitcoin was “be your own bank” but the question is, should you?
In the end, it is also important to mention that crypto banks are just the latest form of professional crypto service providers. Without the pioneering work of early exchanges and other players, crypto would not even have reached the early adopters such as myself. Also going forward mass adoption can only be achieved together by working in partnerships and keeping bad players out of the space by improving UI/UX and regulatory security and liability.
So, no a crypto bank is not a contradiction to the ideals of Bitcoin & Co rather it is an enabler that allows many more people and large corporates to enter the crypto space with full trust.
Sygnum is the world’s first regulated digital asset bank, founded on Swiss and Singapore heritage, operating globally. We make digital assets bankable, secure and convenient, empowering clients to invest in the digital asset economy with complete trust: https://www.sygnum.com/
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