Cryptocurrency, the blockchain-based digital currency that has captivated investors and financial services firms alike, faces an uphill battle. It can be challenging to spend this currency in the same way that you would regular money. However, new services are on the horizon that may enable people to use bitcoin and other digital coins for more mainstream financial transactions.
Here’s how to use these banking-style services for cryptocurrency, along with their associated benefits and drawbacks.
What is Cryptocurrency banking?
Although the term cryptocurrency banking is a misnomer because the exchanges and firms that provide these services are not technically banks, it refers to the methods by which consumers can manage their cryptocurrency balances. At the moment, this type of banking primarily allows users to store funds in a digital wallet or spend them similarly to how they would spend traditional money.
Benefits of Cryptocurrency banking
Currently, the primary advantage of this type of banking is cryptocurrency debit cards. They enable you to spend your digital coin balance just like any other currency or to withdraw it as cash rather than keeping it as an investment.
Prior to the availability of these debit cards, you could spend your cryptocurrency only at retailers that accepted it directly or sold it for dollars. Now, financial technology firms are partnering with chartered banks and/or debit card issuers to offer these cards. They do so by utilising their partner’s logistical and regulatory framework to automatically sell your cryptocurrency behind the scenes, converting it to dollars, and enabling retailers to accept it. This means that your digital funds are accepted wherever a large number of conventional debit cards are accepted.
Challenges in Cryptocurrency banking
Perhaps the most significant impediment to lending and spending cryptocurrency is the currency’s volatility. It’s the same reason that investing in it is difficult: To invest in cryptocurrency, one must accept the risk that “if your coin falls, you could lose a lot of money,” according to Francisco Alvarez-Evangelista, a research associate at the Aite-Novarica Group, a financial services analysis firm.
Numerous banks rely on the currency’s stable value in order to lend, borrow, and earn interest on money, but it is currently not possible to do so with cryptocurrency in a way that is as stable or secure as it is with traditional currency.
And, in order to spend your digital coin, you must accept the risk that its value will increase after you spend it, as your transactions are based on the coin’s real-world value at the time of the transaction. For instance, if the value of your cryptocurrency doubled after you purchased a $5 sandwich, the sandwich would have cost you effectively $10. However, the value may decline, making previous purchases a good deal.
Another impediment to consider is the fact that regulators are still evaluating cryptocurrency fintech companies. The Securities and Exchange Commission of the United States announced recently that it would consider suing Coinbase, one of the most well-known exchange firms, for offering a new lending product, which Coinbase has since cancelled.
Additionally, consumers should be aware that using a cryptocurrency debit card is taxable, as the cardholder is technically selling cryptocurrency when they use their debit card.
How to experiment with cryptocurrency banking
To begin using these types of banking services, you must first acquire cryptocurrencies, such as bitcoin, litecoin, ether, or any other cryptocurrency in which you wish to invest. Numerous apps have simplified the process of purchasing and selling cryptocurrency in small amounts and storing it in a digital wallet.
To easily spend your cryptocurrency balance, you’ll need to open an account with a company that offers cryptocurrency debit cards and accepts the type of digital currency you own. Coinbase, for example, offers a special debit card that enables customers to spend any Coinbase asset and earn cryptocurrency rewards, but new customers are currently on a waitlist. Another company, BitPay, provides customers with a prepaid Mastercard debit card that they can use to spend their digital currency. There are others, but it is not a widely available bank product.
In the future, cryptocurrency may serve as a source of peer-to-peer lending, allowing individuals to quickly and securely make loans to one another. It’s a massive untapped market, but for the time being, the world of cryptocurrency banking is dominated by a small number of players offering some extremely novel products and services.
This article has been adapted from The Conversation.