Katie Horne – Senior Technical Writer
Although cryptocurrencies are becoming more mainstream, they’re still far from being accepted as viable alternatives to fiat currencies like the U.S. dollar, the Euro, and the Chinese Yuan. One key hurdle is in banking.
Though there are established brokers like eToro that offer cryptocurrency trading, dedicated digital asset banking, especially for day-to-day transactions such as those handled by traditional banks, is still limited. This is why the formation of the US’s first digital bank is a significant development.
The Current State of Cryptocurrency
Cryptocurrency is a massive asset class. As of April 2020, over 5,000 cryptocurrencies exist and are being traded with a market capitalization in excess of $200 billion.
In the first quarter of 2020, global economic growth declined drastically as governments around the world issued shelter-at-home orders in an attempt to slow the spread of COVID-19. As a result, prices of most assets fell, and cryptocurrencies weren’t spared.
At the end of 2019, many cryptocurrencies had been doing well, but the economic effects as a result of the coronavirus have eradicated most of these gains. Many cryptocurrencies have rebounded since the mid-March market plunge, but they’re still off their Q1 highs and it’s unclear whether these gains will be maintained.
There are many reasons why people have a positive outlook regarding cryptocurrency despite today’s economic climate and crypto’s history of volatility. One major factor is the use of cryptocurrency as a store of value.
In times of economic uncertainty, many investors move away from riskier options and toward safer ones like gold. Billionaire hedge fund founder Paul Tudor Jones, has sounded the warning bell against central bank “money-printing” and is using bitcoin futures as a hedge against inflation.
Why Crypto Banking is Necessary
One of the reasons why cryptocurrencies are appealing is that they facilitate user-driven transactions that eliminate the bank as the middleman. Not only do funds get moved from one party to another faster, there is no need for anyone to collect fees for the transaction. In short, each individual is their own bank.
However, there are times when the limitations inherent in cryptocurrency inhibit the increased adoption of such assets. Not only are cryptocurrencies a new concept for many people, but it can also be difficult to explain and facilitate services like lending, savings, frequent deposits and withdrawals, and investments. There are institutions that offer such products for crypto users but they are neither common nor mainstream.
More importantly, there is a certain amount of security people demand from their currencies. Because cryptocurrencies are highly volatile and lack the protections offered by both central banks and private institutions, many are skittish about using crypto.
Avanti: What It Is and What It Is Doing
The United States is expected to get its first exclusively crypto bank in 2021.
Dubbed Avanti, which is Italian for forward, the launch of this bank is spearheaded by Wall Street veteran, Caitlin Long. Long plans to operate the bank out of Wyoming, a state with progressive, crypto-friendly regulations on the books. Long has indicated that Avanti will be “protocol neutral” and plans to support all of the cryptocurrency options that their clients demand.
The Avanti website indicates that it will operate under Wyoming’s SPDI (Special Purpose Depository Institution) laws and its digital asset laws. This means that in sharp contrast to fractional reserve banking, fiat deposits with Avanti will be 100% reserved.
Avanti will need to balance the need to comply with regulations, both local and federal, with the need for privacy and security typically expected by cryptocurrency holders. For example, cryptocurrencies allow users to remain anonymous, while US federal regulations, in an attempt to halt money laundering, require banks to know who it is that is depositing money.
Though the full list of services offered by Avanti remains to be seen, the existence of such an entity is an additional sign that cryptocurrencies are gaining mainstream acceptance. And Wyoming now has the attention of the nation as the surprise early mover and pioneer.
Indeed, blockchain banks could bring as much as $20 billion in assets to the cowboy state, according to the Northern Wyoming News.
Reconciling the secretive nature of cryptocurrencies with the transparency required of a traditional financial institution can be difficult. Without crypto banks (which specialize in marrying these two disparate financial fields) to facilitate the day-to-day transactions people need, crypto will never become widespread and commonly used.
The formation of Avanti is a sign of more brilliant innovation to come.