Want to keep your cryptocurrency in a bank? Then why are you buying at all
One of cryptocurrencies' biggest selling points is that they allow people to break away from traditional banking systems. Now banks are hoping to convince you otherwise.As U.S. regulators look more closely at the world of crypto, it's likely that American banks will soon be following their big foreign counterparts in offering retail customers the ability to trade and store digital coins. But why would someone choose to invest through a bank instead of through one of the big crypto exchanges, such as Coinbase? I can't find a lot of reasons why.
Figuring out the best place to buy and sell cryptocurrencies will really come down to what's most important to the investor. If having some sort of safety net to help deal with unexpected problems is a top priority, investing through a bona fide bank may be the best route. By most other measures though, it's hard to see where banks offer any advantage.
Right now, only high-net-worth and institutional customers are offered cryptocurrency services by major U.S. banks, but that may change soon. Regulators are expected to provide more clarity this year on what kinds of crypto-related activities will be acceptable. Despite Bitcoin's volatility and current rough patch, it's reasonable to think that, with clearer rules, banks will be jumping in more aggressively.
For their part, consumers seem to be ready. A December 2020 survey by Cornerstone Advisors showed that 60% of cryptocurrency holders would definitely use their bank if it offered them the opportunity to invest in digital assets, and another 32% said they might. Only 4% said they wouldn't move over from the exchange they use.
Signals from regulators, along with legal precedent, indicate that cryptocurrencies would probably be treated as securities (not cash deposits) from a consumer-protection standpoint. That means that buying a virtual coin through a bank would be akin to purchasing a stock through a bank's investment arm.
So it wouldn't likely be covered by any kind of insurance following market losses. But if there was fraud or a mistake on the bank's part — say, an erroneous debit — long-standing banking and securities regulations would help to make customers whole. As of now, a cryptocurrency exchange isn't subject to those same standards. Protocol for some of the bigger exchanges has typically been to provide refunds when there are system-wide hacks or outages, but there have been plenty of exceptions.
For rookie crypto investors, banks might be a more comfortable way to get started because of their familiarity. Proponents tout the ease of opening an account through a customer's go-to bank, but that seems like a less compelling reason. Taking 15 minutes to upload a picture of a driver's license and fill out some basic information, which is all that most crypto exchanges require, isn't that arduous. And the alleged benefit of having a digital wallet connected to a mobile banking application so that a user can have all accounts under one roof might be helpful, but not really paramount.
It's a mixed bag when it comes to security. Banks may have more experience providing account safeguards such as multi-factor authentication, but exchanges would have more specific expertise when it comes to cryptocurrencies.
For those most concerned about cost, banks come up short there, too. It's hard to imagine that a major bank would be able to assess lower transaction fees than an exchange, where trading charges range from 0.1% to 1.5%. To justify getting into the space and the additional costs of doing so, banks will have to charge more, especially in the early days, says Gabriel Hidalgo, who advises financial services firms on cryptocurrency.
As banks take tentative steps into cryptocurrencies, I would expect them to offer only a few different types of coins (probably the most established ones) and potentially restrict movement between wallets. Those could be major turnoffs for more sophisticated traders.
Remember, the whole point of Bitcoin and other virtual currencies is to circumvent banks. Banks' transaction records are unnecessary when there's a blockchain. And their role as intermediaries becomes obsolete when there's direct trading between buyers and sellers. Yes, when there's a problem, the government requires banks to step in to protect your investment — and that may be the most essential service of all for some. But if you're that risk-averse, why are you buying crypto in the first place?
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.