Crypto Bank and Crypto Banking 101 - NerdWallet (2024)

Let’s start with the “crypto” part. Cryptocurrency, or crypto for short, is a digital form of money backed by computer code instead of a central banking authority such as the Federal Reserve. There are more than 19,000 cryptocurrencies. Only a handful, such as Bitcoin and Etherium, have widespread appeal.

Now for the “bank" part: Any American institution able to call itself a bank must be regulated and licensed to hold U.S. dollars.

Definition

Put together, a crypto bank in the U.S. can mean a licensed financial institution that can hold customers’ dollars as well as crypto. More specifically, Wyoming created a charter in 2019 that enables crypto-based companies to become a limited type of bank called a special purpose depository institution. Three crypto banks with this charter include Kraken, Avanti and Custodia.

These crypto banks can’t lend money like traditional banks, and they lack insurance through the Federal Deposit Insurance Corp. In addition, they don’t have full federal regulation, such as supervision for potential money laundering, which might create some risks that regular banks don’t have.

Why regular banks aren’t crypto banks

While crypto companies can become a type of bank, regular banks probably shouldn’t be referred to as crypto banks simply for offering crypto services. A bank that has mortgages is not called a mortgage bank. Dan Awrey, Cornell Law School professor and financial regulation expert, argues how a narrow definition of crypto bank “ensures the term has a fixed, concrete meaning.”

Calling any regular bank that offers crypto-based services a “crypto bank” can create confusion, especially around whether they’re as safe and regulated as banks that don’t engage with crypto. Crypto products are new for banks, and one early adopter is Oklahoma-based Vast Bank, which lets customers buy, sell and hold cryptocurrency in an account alongside regular bank accounts. The bank is federally regulated and has FDIC insurance for its U.S. dollars, but the crypto is not insured by any government entities.

The term “crypto banking” is relatively new and can refer to a few different activities. Generally, the way people interact with cryptocurrency is by investing, not banking. That can involve buying and selling digital currencies on a trading platform. Traditional banking, on the other hand, is focused on managing cash and credit at a bank, such as with checking and savings accounts and loans.

Crypto banking, at its most basic, can refer to managing digital currency at a financial technology firm or financial services provider. These banking services can include simply holding a balance, making payments with a crypto debit card and even earning interest involving one or more cryptocurrencies.

To manage cryptocurrency, you first need to buy it. And to do that, you need a crypto wallet, which holds proof of your digital assets. Many companies that let you buy crypto can also hold it on your behalf in their free crypto wallets that you must access through their websites or apps.

If you use a crypto exchange such as Coinbase or a financial tech firm such as PayPal, buying crypto can be straightforward: You can pay in U.S. dollars and receive the equivalent value in the digital currency you choose. Then, you can view your balance as you would a bank or investment account balance. Depending on the company, you may be able to send and receive crypto from other people.

Choose where you buy crypto carefully. Some banking companies, including SoFi, don’t let you withdraw crypto from their platforms, so you must sell to use those funds elsewhere. Crypto holders who plan to use multiple platforms or Bitcoin ATMs for in-person transactions should consider crypto wallets that provide storage on software hosted on their computer or portable device. Such wallets let you make transactions without needing a company to confirm them.

Peer-to-peer payment companies Square and PayPal let customers buy, sell and hold cryptocurrencies alongside any balances held in U.S. dollars. Banking technology firms Revolut and SoFi have similar offerings.

PayPal also lets you pay for online purchases with a crypto balance, which means you sell the currency back to PayPal at checkout.

Since these companies have established presences with mainstream banking services, they may be easy starting points to explore crypto. But watch for transaction fees and limits, including the types of crypto available. Square’s Cash App, for example, offers purchases of Bitcoin only, while PayPal and others offer three or more cryptocurrencies.

Unlike most U.S. banks, Quontic Bank provides a unique way for customers to get Bitcoin. In December 2020, the bank launched a Bitcoin Rewards Checking account. Few banks offer rewards checking options — and when they do, they typically provide interest or cash back.

At Quontic, when you make a debit card purchase, 1.5% of the transaction amount in U.S. dollars gets converted into Bitcoin and managed by a third-party firm. There is no maximum you can earn. The account has no monthly fees, and your money in dollars is FDIC-insured.

You can’t withdraw the Bitcoin to use elsewhere. Instead, you redeem it in dollars, which costs a 2% fee. The account is available in 48 states, Washington, D.C., and Puerto Rico.

More than a dozen crypto-based companies, such as Crypto.com and Gemini, offer versions of a savings account, generally called a crypto interest account. These firms do something similar to what traditional banks do, but with crypto instead of dollars: The firms borrow the money in your savings account to make loans to other customers and pay you interest in return.

While the national average interest rate for traditional banks’ savings accounts is barely above zero, rates on a crypto interest account can be in the double digits. If that sounds too good to be true, consider the risks and complexities around cryptocurrencies.

Rates can change with market demand, and when a cryptocurrency drops in value, you can lose more money than you earn in interest. Comparing annual percentage yields isn’t as intuitive as it is with traditional savings accounts where all accounts use the same currency. Consider fees, minimum limits and how long it can take to withdraw money back into U.S. dollars, especially since you're lending out what's in your crypto interest account. Another risk is not being able to withdraw crypto indefinitely from a crypto exchange during downturns in the crypto market.

Because it's such a new and volatile currency, there are some inherent risks involved with managing your crypto.

Your crypto isn’t protected by the FDIC or the Securities Investor Protection Corporation if the company you buy it from fails. For a bank account, the FDIC insures up to $250,000; and for a brokerage account, the SIPC covers up to $500,000. (SIPC coverage excludes losses from declining values of stocks and other assets.)

The value of cryptocurrencies can fluctuate rapidly. "You don’t want to put anything into crypto you can’t afford to lose,” says Ryan Cole, certified financial planner and founder of the investment advisor firm Citrine Capital in San Francisco.

There’s no guarantee that you’ll get your money back, especially during a crypto crash. In June 2022, crypto exchange platform Celsius paused all withdrawals and transfers, leaving customers’ funds out of reach.

The banking and crypto industries have intersected more in the past year alone, and it’s likely to continue in that direction. The financial technology provider Kasasa announced a partnership with a crypto firm to offer Bitcoin wallets to its network of over 900 community banks and credit unions. Several crypto banks, licensed thanks to Wyoming’s relatively new bank charter, hope to be a bridge between dollars and crypto for customers. But large questions remain for the future of crypto banking, particularly as a crypto crash hit the market in May 2022.