Many traditional banks are now offering crypto custody services, providing a familiar avenue for those looking to enter the crypto space. However, entrusting your cryptos to banks comes with both risks and benefits for crypto newcomers.
In this article, we’ll explore why you should carefully consider the pros and cons of letting banks hold your cryptos.
The Risks of Bank-Custodied Cryptos
When you deposit your cryptocurrencies with a bank, you cede control over your assets. Banks can impose restrictions, such as withdrawal limits or transaction approvals, which can hinder your ability to use your cryptos as you see fit. There are other risks that you should also consider:
- Counter to Decentralization: One of the fundamental principles of cryptocurrencies is decentralization, removing the need for intermediaries like banks. Trusting a bank with your cryptos contradicts this principle and reintroduces centralization.
- Security Concerns: While banks have robust security measures in place, they remain attractive targets for hackers. If a bank’s crypto custody infrastructure is compromised, your assets could be at risk, as we’ve seen in several high-profile crypto thefts.
- Fees and Charges: Banks often charge fees for crypto custody services, including maintenance fees, transaction fees, and potentially even fees for withdrawal or transfer. These costs can eat into your crypto holdings over time.
- Legal and Regulatory Risks: Crypto regulations vary greatly by country, and the legal status of cryptos is still evolving. Placing your cryptos in a bank’s custody exposes them to potential legal risks, as authorities may scrutinize bank-held assets differently from self-custodied ones.
A research note from the bank said #BTC currently holds 20% market share of the 'store of value' market, with 80% held by gold
Goldman predicts bitcoin gaining market share. A 50% share would equate to $100K bitcoin by 2027 📈 pic.twitter.com/4CTZMnRnJh
— DefiDive (@defi_dive) January 6, 2022
The Benefits of Bank-Custodied Cryptos
It’s true that Banks provide a familiar interface for many people, making it easier for newcomers to the crypto world to get started. This can promote greater crypto adoption. Here are 3 important benefits of letting a bank manage your cryptos:
- Security Measures: Banks have well-established security protocols, including insurance coverage for assets held in custody. This can provide peace of mind for those concerned about the safety of their investments.
- Simplified Tax Reporting: Banks can assist with tax reporting by providing clear records of your crypto transactions and holdings. This can make it easier to navigate the often complex world of crypto taxation.
- Institutional Services: Banks can cater to institutional investors, offering services like cold storage, compliance solutions, and custodial services that meet the stringent requirements of large financial institutions.
Why a Balanced Approach is Key
Rather than viewing the decision to use a bank for crypto custody in black and white, it’s essential to consider a balanced approach that suits your individual needs and risk tolerance. Of course, the idea is that everyone can hold their own crypto assets, but that will take some time for people to familiarize themselves with web3 tools like non-custodial wallets. So, if you need a bank to hold them for you, here’s how to do it:
- Diversification: Don’t put all your crypto holdings in one basket. Consider holding a portion in a bank’s custody for added security, while also keeping some under your direct control in a personal wallet.
- Research and Due Diligence: Thoroughly research the bank’s reputation, security measures, and fee structure before entrusting your cryptocurrencies to them. Look for insurance coverage and compliance with relevant regulations.
- Stay Informed: Keep up with the latest developments in the crypto space, including regulatory changes and new security threats. Be prepared to adapt your strategy accordingly.
- Maintain Some Self-Custody: Retaining control over a portion of your cryptos by self-custodying it in a secure wallet ensures you remain connected to the core principles of decentralization and independence.
Hi, with BlokFi and similar services you deposit your crypto to their custodial app and that's pretty much the same as when a bank holds your money or Bitcoin. You do not own private keys to your coins directly. Learn more in this article on our blog 👇 https://t.co/KjgFWz15Sp
— Trezor (@Trezor) April 28, 2021
The decision of whether to let banks hold your crypto assets is not a one-size-fits-all choice. There are benefits, such as added security and accessibility, but also significant risks, including loss of control and counter to decentralization.
By taking a balanced approach and understanding the implications, you can make an informed decision that aligns with your financial goals and risk tolerance. Ultimately, your crypto strategy should strike a careful balance between trust and self-reliance.
The information discussed by Altcoin Buzz is not financial advice. This is for educational, entertainment, and informational purposes only. Any information or strategies are thoughts and opinions relevant to the accepted levels of risk tolerance of the writer/reviewers and their risk tolerance may be different than yours. We are not responsible for any losses that you may incur as a result of any investments directly or indirectly related to the information provided. Bitcoin and other cryptocurrencies are high-risk investments so please do your due diligence. Copyright Altcoin Buzz Pte Ltd.