Since the pandemic began, consumer interest in cryptocurrency has increased significantly. According to a CNBC poll, 11% of consumers aged 18 to 34 invested in crypto assets with stimulus money.
Part of the reason is that cryptocurrency exchanges and other platforms are now delivering financial solutions that compete with — and often even outperform — traditional banking and lending. While you may put your crypto in a savings account and earn up to 10% on the balance, or use it to arrange a loan without a credit check, lawmakers and regulators are concerned about the traditional financial services industry’s lack of stability and consumer protections.
THE MOST IMPORTANT THINGS TO KNOW
Cryptocurrencies are digital assets that can be traded for goods and services or utilized as a speculative investment.
Crypto platforms provide high-yield savings accounts with interest rates that considerably surpass regular savings accounts, as well as secured loans that do not require a credit check.
While these financial products are enticing, particularly to unbanked and low-credit consumers, regulators and legislators are concerned about the lack of stability and consumer protections that surround them.
Consumers who have been locked out have new opportunities.
Since 2009, when bitcoin was first announced, crypto currencies have been around. Thousands more cryptocurrencies have appeared since then, some with specialized objectives and others without.
Traditional payment methods do not offer the same level of privacy and security as digital assets. Exchanges and other platforms have started to offer new financial products and services as cryptocurrency has grown in popularity.
Many organizations, for example, provide the opportunity to earn interest on your digital assets, much like a high-yield savings account. However, rather than paying you a fraction of a percent in interest, some companies are paying up to 10% on specific digital assets.
Many crypto platforms now provide crypto-backed loans, which work similarly to securities-based lending in that they allow you can utilize your holdings as collateral to receive a loan. Interest rates are often in the single digits, and no credit check is usually necessary.
Crypto platforms have opened doors for people who have previously been denied access to certain financial services in both cases. You’ll have a hard time getting a standard personal loan with bad credit, and most banks and credit unions give poor returns on their deposit accounts.
Furthermore, according to the Federal Deposit Insurance Corporation (FDIC), around 7.1 million families in the United States are unbanked2, and crypto savings accounts do not have the same prerequisites for opening as traditional bank accounts.
Cryptocurrency users are at risk due to a lack of stability and consumer protection.
While crypto platforms’ financial services may appear tempting when compared to their traditional equivalents, users are taking considerable risks with these goods, which they may not be aware of.
To begin with, despite their increasing popularity over time, cryptocurrencies remain exceedingly volatile. You’ll be faced with a margin call if you take out a crypto-backed loan and the value of your assets plummets. In this case, you’ll have to either pay a larger deposit or wait for the provider to liquidate part of your assets to offset the loss. And because you’re borrowing money, it’s unlikely that you’ll be able to make that extra deposit, so you can wind up losing money.
Stablecoins, according to some crypto experts, are the solution since they are linked to an external source of value, such as the US dollar. Even still, assets such as Tether have been criticized for not having enough fiat currency reserves to fully support them.
Earning a high yield on your investments with cryptocurrency interest accounts can be appealing. Your assets are not guaranteed as they would be in a regular bank or investment account if the platform that provides the account or the cryptocurrency itself collapses.
Finally, despite their improved security, crypto networks are still vulnerable to hacking and fraud, and there aren’t enough regulations in place to safeguard customers in these situations.
Traditional Banking Regulations
On the Horizon is Involvement
Traditional banks are jumping into cryptocurrencies at the same time as they are pushing regulators to slow down their crypto competitors. They see the value of digital assets, as well as the potential for large gains.
Visa and Mastercard have both declared plans to integrate cryptocurrency into their networks, and big banks from around the world have poured hundreds of millions of dollars into blockchain startups.
According to Investopedia, several lenders are now offering cryptocurrency reward credit cards.
Traditional financial institutions are likely to continue using blockchain and cryptocurrency technologies into their goods and services. However, crypto aficionados should be prepared for government restrictions that would, ideally, give more stability and protection while potentially curtailing some of the existing perks.