Andrey Elinson: Crypto Banks May Compete With "Old-Timer" Institutions

Crypto banks may compete with “old-timer” institutions but traditional financial establishments will hinder the emergence of a new industry.

The largest traditional banks will seek to control the growing cryptocurrency market, but the industry will remain segmented. Cryptotrader Andrey Elinson talks about crypto banking’s global prospects.

“Digitalization already permeates all economic processes. The same thing is happening in the monetary system. This evolution has prompted the development of the next generation of financial institutions: crypto banks“, says Andrey Elinson. 

Next-Generation Banking

Having appeared about five years ago, today’s crypto banks combine traditional payment systems with the cryptocurrency industry, explains the expert. They offer digital asset storage, depositing, and crypto-acquiring services, lend cryptocurrency to customers, and issue regular cash. Crypto banks conduct operations with both digital and fiat money.

But most importantly, crypto banks issue virtual and physical cards with which one can pay in cryptocurrencies and even get cashback, explains Andrey Elinson. 

These organizations operate as a decentralized system and have no special licenses. The trader points out that this is because countries, even those where cryptocurrencies can fully participate in the monetary exchange, have yet to form a comprehensive regulatory framework for the crypto industry. 

“The reason is simple – the cryptocurrency market is quite young and is currently going through a phase of active development and growth“, notes Andrey Elinson.

For example, in Germany, Japan, and Switzerland – the mecca of “classic” banks – cryptocurrencies are legal, i.e., recognized as a means of payment. These countries also have crypto banks. In many other countries, from Venezuela to Italy, digital assets are also increasingly becoming part of the national financial systems.

A Temporary Schism

At the same time, not all banks are ready to work with tokens and crypto projects. “Crypto banks, on the contrary, are tailored to such work. They can act as conductors of crypto investments in the real economy and help to make cryptocurrency as convenient as conventional money“, notes Andrey Elinson.

Representatives of “veteran banks,” including Bank of America and Citibank, have publicly voiced their concerns regarding cryptocurrencies. For them, cryptocurrencies are essentially “terra incognita,” which makes it difficult to assess long-term risks. In addition, many bankers, though they don’t want to admit it, see cryptocurrencies as a threat to the existing banking system. They fear that decentralized platforms and digital assets may eventually replace them. Moreover, some digital currencies are already secured by gold. That is, they are essentially no different from the US dollar, says cryptotrader.

“It is a bit ironic, really. They like blockchain technology itself, as it is tamper-proof and greatly speeds up traditional transactions“, adds Andrey Elinson.

Moreover, it is wrong to consider cryptocurrencies and banks as antagonists. They can cooperate quite successfully if they wish to. Germany’s largest crypto bank, Bitwala, works with  Solarisbank, a local tech company with a banking license.

Moreover, the world’s banks are actively sizing up  cryptocurrencies. The most advanced are already adapting their processes and facilities to them, and America’s Goldman Sachs and J.P. Morgan, Japan’s Mizuho Financial Group, and Britain’s RSCoin are developing their own cryptocurrencies. This is because, in 2020, the U.S. financial regulator allowed financial institutions to provide cryptocurrency storage services to customers, effectively giving the banks a green light to work with the new money. Thus, 2021 became the year of experimentation. “Of course, the events of 2022 have cooled the ardor of many, but, as you know, the process continues“, says Andrey Elinson. “Given their customer base, reputation, and infrastructure, the leading traditional banks can compete strongly with crypto banks should they wish to.“

Potential competitors also include PayPal and similar operators, adds the expert.

Fight or Die 

The expansion of banks to the crypto market will be gradual, believes Andrey Elinson, especially after major crypto banks Silvergate Capital and Signature Bank borrowed more than $13 billion from the consortium of Federal Home Loan Banks (FHLB) at the end of last year to make up for the losses from the mass exodus of customers from the cryptocurrency market. Just like the rest of the market, they have been affected by the bankruptcy of FTX Group. 

The temporary crisis in the crypto market has caused the supporters of the traditional financial system to become more vocal. For example, some senators have suggested considering a ban on cryptocurrencies. The other day, the New York State Department of Financial Services initiated an audit of Paxos Trust, an issuer of Pax and Binance stablecoins, which, along with other stablecoins, analysts consider to be the driving force behind the crypto market.

“At the same time, lawmakers acknowledge that this will cause an outflow of digital assets offshore into the gray zone – a process that will be irreversible“, notes Andrey Elinson.

Given the observed recovery of the crypto market and the global interest in it, the expert identifies five interrelated trends:

1. The rising number of crypto industry participants, the growth of their capitalization, and their increasing influence on the global financial turnover will be accompanied by the formation of a service industry: crypto banks and similar organizations that will link the online and offline worlds. Traditional banks will be forced to join in so as not to be left on the sidelines as a result of progress.
2. The popularization of tokens among the general population will further drive the development of crypto banks. Their functionality and infrastructure will be improved.
3. The more crypto succeeds, the more the fiat system will resist it. This is likely to inhibit the creation of a specialized regulatory framework.
4. Once traditional banks have adapted to cryptocurrency and incorporated “virtual coins” into their system, they will begin to displace their service competitors. M&As are also possible, especially when it comes to the purchase of cryptocurrency exchanges.
5. The crypto market will remain segmented. For a very long time, at least. But once the number of its participants grows, it will begin to “crystallize” and enlarge.

“This is why many investors strive to get on this gold train despite the recessions and hype“, concludes Andrey Elinson.