Education

Fiat Bank Vs. Crypto Platform

Fiat banks and crypto platforms offer two competing visions for modern global finance. Before diving into fiat banks vs. crypto platforms,  we first look at how monetary policy impacts the money supply of fiat and crypto.

Money Supply Comparison: Fiat and Crypto

National governments are responsible for printing fiat currencies. For instance, the U.S. Treasury Department prints US Dollars, and national central banks within the eurozone print Euros. Crypto, as we know it today, isn’t created by a government. It’s actually created according to the programmed rules of a public blockchain.

Fiat monetary policy is subject to change at any point in time. A government legislature can pass a bill to authorize the creation of new fiat currency to stimulate the economy or pay off debt. This printing of new money expands the total money supply. In contrast, creating cryptocurrency coins usually requires mining or staking of cryptocurrencies that reward users for validating transactions and securing the network. For cryptocurrency tokens, creating cryptocurrency happens through token generation events. In many ways token generation events are like printing of fiat; however, the major difference is that most tokens have finite total supplies and stricter printing schedules.

Now that the differences between crypto and fiat have been explained, we compare the services offered by fiat banks vs. crypto platforms.

Fiat Platforms

A fiat bank is basically almost any traditional bank that you are familiar with. Examples include JPMorgan, Deutsche Bank, and Industrial and Commercial Bank of China. Fiat banks provide a place to store fiat currencies (US Dollars, Euros, Yuan, and more). Most offer checking accounts and savings accounts as well as personal loans.

The era of online banking that began in the early 2000s was a technological leap forward for fiat banks. Today it is easy to do things like pay bills online, deposit and withdraw funds, and more without having to ever walk inside a physical bank location. Now, there are even many banks that don’t have any physical locations and operate 100% online.

One of the biggest advantages to fiat banks is deposit insurance. For example, in the US, FDIC covers $250,000 in deposits per account owner/ownership category, per insured bank. This policy protects consumers in case of unforeseen scenarios such as bank closures. In many nations across the globe, however, deposit insurance doesn’t exist. As a result, savings can be wiped out in times of economic or political turmoil. In tandem with uncontrolled money printing and lack of accessible banking infrastructure, fiat banks are often unreliable in many regions of the world.

Even in nations where the economy is stable, fiat banks don’t offer a great solution for building wealth. In many cases, bank savings accounts pay out negative interest rates, which means customers are actually paying the bank to hold money on their behalf. At the same time, fiat banks are able to lend out fiat to other consumers or institutions and make massive profits. Although the bank is taking on the risk of personal loan defaults, the saver who wants to save is actually losing money over time. This is because inflation almost always outpaces the yield generated from savings accounts. In many years, inflation is well over 3% while annual percentage yield (APY) for savings accounts is less than 1%. 

Fiat banks are a reliable option for keeping fiat in a secure place but not a place to invest for retirement. This is why many people choose to put money into investments such as stocks, 401(k) plans, Roth IRAs, cryptocurrency. These investments can generate higher APY, but there are of course specific risks with each. For example, stock market crashes happen once every ten years on average, and the cryptocurrency market is highly volatile. Although recoveries in financial markets are fairly common, there’s always the chance that you need extra money immediately for life expenses when an investment market isn’t performing well. In turn, deciding to take money out of a market could derail long-term investment planning.

This is where a crypto platform can be a better option for investing.

Crypto Platform

A crypto platform operates similar to a fiat bank, with a few key differences. Overall, crypto platforms offer a range of advantages over fiat banks. 

Instead of having a checking account, crypto platforms provide users with a cryptocurrency wallet. Like fiat banks, crypto platforms are considered to be custodians, meaning they are responsible for maintaining security of customer funds. However, customers are in part also responsible for keeping their accounts secure by adhering to common security practices such as enabling two-factor authentication as well as protecting their password or recovery phrase. Since transactions on any public blockchain can’t be reversed, having proper security is a necessity not a privilege. Unlike fiat banks, crypto platforms aren’t insured by national governments.

There are plenty of upsides to using crypto platforms. While fiat banks pay minimal to negative interest for savers, crypto platforms have started offering crypto savings accounts that offer APY that is highly competitive. For example, Abra Earn currently offers 8% APY on USD Stablecoins. Saving cryptocurrencies like Bitcoin and Ethereum also offers high interest.

Loan offers are much more competitive and accessible with crypto platforms than fiat banks. Abra Borrow, for example, offers a crypto loan with 0% APR at 10% LTV. That means you can get a loan of $1,000 in a USD Stablecoin by depositing $10,000 in crypto without a credit check or long application form. In comparison, the average personal loan from a fiat bank charges 9% APR. Sometimes this rate is upwards of 35% annually. With fiat banks, there is also the hassle of filing banks and waiting for approval. Often fiat banks reject loan applications of potential customers. With crypto platforms, the approval process is instant. The biggest advantage of a crypto loan is that customers can generate capital without having to sell their initial crypto investment. Using an overcollateralized loan model, users lock-in crypto like Bitcoin or Ethereum as collateral. Then, the loan is generated via a Stablecoin. It’s then easy to convert that Stablecoin back into fiat directly at a 1:1 ratio. This money can then be used to pay for bills, rent, food, and other expenses.

Another benefit to crypto platforms is that cryptocurrencies can be used worldwide and aren’t limited to specific nations or regions like fiat currencies. As a result, crypto platform services like savings and lending products are similarly accessible throughout many regions of the globe.

Summary

Fiat banks have been around for centuries, whereas crypto platforms have been around for less than a decade. Crypto platforms have risen in popularity because they offer a more innovative product that solves many of the limitations of traditional banking. Crypto platforms offer a place to keep crypto funds, earn higher interest through lending, and receive a loan instantly at competitive interest rates.