Crypto Banking Creates New Opportunities for Consumers—and Some New Risks

High interest rates and easy loans are appealing but lack consumer protections

Cryptocurrency has enjoyed a significant rise in consumer interest since the pandemic began. According to a poll by CNBC, 11% of consumers between the ages of 18 and 34 used their stimulus money to invest in crypto assets. 

Part of the reason is that crypto exchanges and other platforms are offering financial products that compete with—and even outperform—traditional banking and lending. But while you can stash certain digital assets in a savings account and earn upwards of 10% on the balance, or use your crypto to secure a loan without a credit check, lawmakers and regulators are concerned about the lack of stability and consumer protections that the traditional financial services industry provides.

Key Takeaways

  • Cryptocurrencies are digital assets that can be used as a speculative investment or, in some cases, to buy and sell goods and services.
  • Crypto platforms offer high-yield savings accounts with interest rates that far outpace traditional savings accounts, as well as secured loans with no credit check.
  • While these financial products are appealing, especially for unbanked and low-credit consumers, the lack of stability and consumer protections surrounding them are a major concern for regulators and legislators. 

New Opportunities for Consumers Who Have Been Locked Out

Cryptocurrencies have been around since 2009, when bitcoin was first introduced. Since then, thousands of cryptocurrencies have emerged, some with specific purposes but not always. 

These digital assets provide a level of privacy and security that users can't get with traditional payment methods. As crypto has become more popular, exchanges and other platforms have begun offering new financial products and services.

For example, many companies offer the chance to earn interest on your digital assets, similar to a high-yield savings account. But instead of giving you a fraction of a percent in interest, some are offering upwards of 10% on certain digital assets.  

Additionally, many crypto platforms offer crypto-backed loans, which allow you to use your portfolio as collateral to secure a loan, similar to securities-based lending. Interest rates are relatively low—often in the single digits—and there's generally no credit check required.

In both instances, crypto platforms have created opportunities for people who have been excluded from certain financial services. If you have less-than-stellar credit, you'll have a hard time finding a traditional personal loan that inexpensive, and most banks and credit unions offer dismal returns on their deposit accounts.

What's more, roughly 7.1 million households in the U.S. are unbanked, according to the Federal Deposit Insurance Corporation (FDIC), and crypto savings accounts don't have the same requirements to open as a traditional bank account.  

Lack of Stability and Consumer Protections Put Crypto Users at Risk

While the financial services that crypto platforms are providing can be appealing compared with their traditional counterparts, there are significant risks that consumers are taking on with these products, and they may not be aware of it.

For starters, while cryptocurrencies have gained in popularity over the years, they remain extremely volatile. So if you take out a crypto-backed loan and the value of your assets drops significantly, you'll be faced with a margin call. In this instance, you'll either need to make an additional deposit or watch the provider sell some of your assets to cover the loss. And considering that you're borrowing money, it's unlikely that you'll be able to make that additional deposit, so you may end up losing assets. 

Some crypto experts argue that stablecoins are the answer because they tie their value to an external source like the U.S. dollar. But even then, assets like Tether have come under fire for not having sufficient reserves of fiat currency to back them 100%.

With crypto interest accounts, earning a high yield on your assets can also be tempting. But if the platform providing the account or the cryptocurrency itself fails, your assets aren't insured as they would be in a traditional bank or investment account.

Finally, despite their increased security, crypto networks can still be vulnerable to hacks and fraud, and there aren't sufficient regulations in place to protect consumers in these instances.

Regulations and Traditional Bank Involvement Are on the Horizon

At the same time that traditional banks are asking regulators to slow down their crypto competitors, they're also getting into cryptocurrency themselves. They understand that there's merit—and the chance for big profits—in digital assets.

Both Visa and Mastercard have announced plans to bring crypto onto their networks, and major banks from around the world have invested hundreds of millions of dollars in blockchain companies. Some lenders are also starting to offer crypto rewards credit cards, as Investopedia has reported.

It's likely that traditional financial institutions will continue to integrate blockchain technology and cryptocurrencies into their products and services. But crypto enthusiasts should still be ready for government regulations that will, ideally, provide more stability and protection—while possibly curbing some of the benefits they currently enjoy. 

Article Sources
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  1. CNBC. "Half of Young Investors Invested Their Stimulus Money, CNBC Survey Finds. Here's Where They Put It."

  2. Federal Deposit Insurance Corporation. "How America Banks: Household Use of Banking and Financial Services."

  3. Blockdata. "Top Banks Investing in Crypto & Blockchain Companies."

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