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Crypto banks are changing the financial industry

Blockchain technology is coming up strongly as the technology for the future.

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Blockchain has continuously evolved from underpinning Bitcoin to being a buzzword, to developing real-life use cases. The financial sector is one of the key areas where blockchain usage is expected to flourish. So far, cryptocurrencies (and blockchain) have seen to it that it is no longer business as usual for finance. The change in how people conduct global monetary transactions through cryptos cannot be ignored. Be it simple user-to-user money transfer, payment for goods and services or crowdsource project funding through ICOs, blockchain is rapidly being integrated into our day-to-day financial interactions.

Crypto banking is an important in restructuring the wider scale of the financial industry. It comes as an improvement of centralized traditional banking systems. Being decentralized platforms, they offer services similar to those of traditional banks except they are more transparent, secure, trustworthy and less bureaucratic thus more efficient and faster.

What are crypto-banks?

Cryptocurrencies are a virtual medium of exchange. They do not have physical forms and all their transactions take place online. Users generally store them in crypto wallets which act as banks. Crypto exchanges also offer storing services where users can choose to either keep their assets on exchange wallets or on other preferred wallets. These forms of online storing create a banking feature. With this as a rough idea on how ownership of assets is established and secured, crypto-banks can be defined as sophisticated exchanges or wallets. Bearing focus on a variety of services such as; inbuilt exchanges, payment gateways, credit services, open source networks, personal and business accounts amongst others, crypto-banks bring to life global internet-based banking facilities.

Crypto-banks draw their power from the use of blockchain technology. They employ blockchain to enable peer-to-peer (P2P) transactions and use of smart contracts to execute terms set out in contracts. As a result, transactions are automated at increased speeds and lower costs. All services within a crypto-bank ecosystem enjoy convenience originating from the attractive inherent blockchain capabilities centering on transparency, privacy, and security.

Credit facilities, for instance, are managed through decentralization by directly linking borrower and user. This is a reliable option that ensures borrowers have a better chance of receiving loans timely as long as they have a good credit rating. Unlike traditional banks, the direct linking cuts out intermediaries and long processes to execute services within the shortest timelines possible. For loans, they are generally processed within 24 hrs. They also do not have the inconvenience of ‘business days and hours’ which limits transactions within specific times.

To create friendly and user-oriented loaning services, crypto-banks use artificial intelligence (AI) to come up with reliable rating systems. To also strengthen the banks, borrower information is structured and analyzed using AI to create detailed assessments of loaning risk involved. By crypto-banks involving tools of accuracy and precision in their loaning, the crypto banking system becomes less vulnerable to bankruptcy. This approach becomes a multifaceted structure favorable to both borrower and lender. Borrowers are protected from bias seen with human involvement in conventional banking as whereas lenders are cushioned from bad debtors.

Cryptobanks quickly coming to life

Crypto banks may not be way out there but they are also not just in theory. Crypto banking projects are gradually entering the market and today, crypto users can boast of a variety of crypto-banks to choose from. No doubt, crypto users can begin feeling comfortable from the competitive development in the crypto banking space as it sets a healthy direction for growth.

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Among the many in existence is Galaxy Digital LP founded by billionaire and former Wall Street fund manager Mike Novogratz. It is a “diversified merchant bank dedicated to the digital assets and Blockchain technology industry with a multi-disciplinary team that has experience in investing, portfolio management, capital markets, operations, and blockchain technology.” Galaxy Digital, however, is not involved in issuing crypto loans. As enumerated in its team experience, it is focused on crypto investments, consulting and trading.

Datarious is another notable crypto-bank. In contrast with Galaxy Digital, it is more focused on offering credit services. Datarious looks to offer the “widest possible instruments” in instant transfer systems integration among them Money Gram, Transferwise and Western Union. It has a rewards system in “fees for activities, earning possibility roles, programs and commission back.”

Datarious raised $1.6 million in its Initial Token Offering (ITO) and is set towards its goal of “demonstrating that fintech can be completely different.” The crypto bank also does not impose services on users. It has a three listing model for users which categorizes them under trust levels; Trust Limit, Trust Management, and User ratings. With this model, users have the freedom to choose their terms and costs.

Crypto banks use blockchain technology that employs the use of P2P transactions. (Photo by totojang1977 via Shutterstock)

Fotonbank, taking the same direction as Datarious, seeks to become a “financial ecosystem of the future” with credit issuance being a significant service. Its other groundbreaking features are payments through contactless payments and the development of blockchain technology. Foton envisions a complete revolution in the world of banking through its multi-currency transactions with a built-in fiat and cryptocurrency exchange. Its interbank ecosystem is powered by its light in-house blockchain technology that combines customer services processes and finance.

Through its ecosystem, Foton can establish and manage various social institutions through their decentralized registry. Importantly, it provides a simple and understandable crypto tool with minimum fees and secure transactions through Smart Contracts.

Revolut sells itself as a “Radically Better Account” with services comprised of current account, built-in budgeting, insurance, global money transfer, and a crypto exchange. It offers transactions in up-to 150 currencies in fiat and crypto whereby its interbank exchange rate is 0.5 percent of anything above 5,000 Pound Sterling. This is comparable to Foton’s 0.5 percent charge on the total payment amount.

Revolut offers its users a crypto debit card. The bank recently secured a European Banking license and will be expanding from the UK to Asia and America. In the same vein of expansion, Foton is set to create a Blockchain based financial organization aptly named founders Bank. The bank, to be based in Malta, will be owned by token shareholders thus making it a public-owned bank. Binance founder Changpeng Zhao is one of the notable investors in the Founders Bank project.

Crypto-bank pros and cons

If people could keep long records over time, ensure all numbers add up and be sure they could trust each other completely when entering into transactions, they would not need banks. Banks have become a necessary evil; they are expensive, take away user control on own monies, are subject to bankruptcy and as if those were not enough, we have to make do with gross intended or accidental human errors.

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Crypto banking flips the coin and brings to play a host of attractive financial features that can drive crypto-banks to gain a strong footing over traditional banks. First, decentralization cuts out intermediaries and involvement of unnecessary long chains of people. By easing out on processes and number of persons involved, crypto banking systems become faster and cheaper. Technically, they allow users access to banking facilities while ‘not’ banking if the traditional definition of banking is anything to go by.

Crypto-bank loans are also better with public credit scores which ensure there is no bias in their issuance. Also, loans are offered in the network’s native coin which strengthens the system by creating a demand for a given token. Many blockchain startups fail as they do not have much use for the coins they offer to raise funding. Taking advantage of this, crypto-banks can turn the lending sphere to adopt P2P lending which is a faster and more reliable.

Removal of the concentration of management in the banking sector from the hands of a few and giving power to the public could lead to a global community of shareholder. With this set of better options, crypto-banks stand a better chance at becoming an alternative to traditional banking in the financial industry.

However, this is not going to be outright easy. It is a long-haul whereby structures need to develop to guarantee positive growth. Currently, cryptocurrencies do not have the desired standing with institutional investors and funding. Some have not entirely understood the technology or dissuaded by the industry shortcomings in uncertain regulations as well as volatile crypto prices. Also, crypto banking has received aggressive resistance and opposition from established traditional entities that feel cryptocurrencies and their resultant technology are a threat to their businesses.

Conclusion

As earlier discussed, blockchain forms the backbone for crypto banking. However, financial institutions are not the only entities adopting blockchain. Blockchain is seen across the board and seems to literally fit into almost everything. With the understanding that blockchain is being vigorously adopted in various other industries, banking cannot be left behind in the revolution process. Take a production process for instance. As companies decentralize the processes of raw material development, processing, distribution, and sale, it is inevitable that they will also require decentralized banks.

(Featured image by Volodymyr Shtun via Shutterstock)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Nikolaos Kostopoulos is a Fintech advisor incumbents with a focus on Capital Markets & asset tokenization. Nikolaos is a pioneer in the consensus industry since early 2015. He is an early adopter and enthusiastic evangelist for decentralized technology as a way to improve many aspects of the modern world. His Master’s thesis “Developing an optimal financial and regulatory governance mechanism for cryptocurrencies in the European Union” was among the very first academic papers to argue the need and the method for regulating cryptocurrencies in the European Union. Nikos is a frequent speaker at financial events related to regulation and Security Token Offerings.

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