Crypto banking: What it is and how to start

Learn about earning interest on, or borrowing against, crypto assets – and the risks involved.

As cryptocurrencies like Bitcoin, Ethereum and Litecoin go more mainstream, fintechs are offering versatile ways for you to manage, spend and earn on your cryptocurrencies. But while crypto banking products offer the potential for big rewards, they don’t provide the safety net of traditional banking. Find out if this new breed of products is worth considering.

What is crypto banking?

Cryptocurrency is digital money stored and traded on digital exchanges, and crypto banking is a term used to describe exchanges or fintechs that let you buy, sell, store and manage your cryptocurrency from a digital wallet. These services are designed to replicate the user experience of traditional or online banks.

What you can do with your cryptocurrencies beyond that depends on the platform you use and the country you’re in.

Some crypto banking services let you make payments through crypto debit cards and earn higher returns than you might find in a traditional bank.

Some global firms allow crypto to be used as collateral for loans. There are also all-in-one platforms that allow users to buy, sell and earn crypto through products like crypto-backed loans, trading accounts, savings accounts and a credit card. However, the firms we checked did not offer all these services in the UK.

2 ways to get involved in crypto banking

You can get involved in crypto banking through 2 common routes.

  1. Owning cryptocurrency and using a crypto banking service which will lend it out to other users, earning you a return in interest.
  2. Depositing pounds sterling into a crypto banking service and allowing it to convert your money into crypto to lend out, and pay you interest on your total balance.

Carefully read the small print of the crypto exchange you’re interested in to make sure it offers the services you’re looking for. You may be required to tie up your cryptocurrency for a specified period of time before you can begin using it, or have to wait for a period of time before you can withdraw it.

Crypto debit cards

Crypto debit cards are linked to your crypto wallet and convert your crypto coins into GBP at the time of your transaction. There are several crypto debit cards available in the UK including:

  • eToro. Available to all UK members of eToro’s Club programme, the eToro Money Card lets you make purchases using your crypto holdings. It connects to an eToro Money Account, where you can store and manage fiat and cryptocurrency funds.
  • Ziglu. UK-based Ziglu is a platform that enables its account holders to hold and trade cryptocurrencies and fiat currencies. It also has a Mastercard debit card which allows users to spend their funds anywhere Mastercard is accepted.
  • Coinbase. This is a Visa debit card funded by your Coinbase balance. Users can spend any cryptocurrency they want anywhere Visa is accepted as long as they have the virtual asset in their Coinbase balance.
  • Cryptocurrency warning: Cryptoasset investing is unregulated in the UK. There's no consumer protection. Your capital is at risk

Crypto credit cards

Like traditional credit cards, cryptocurrency cards offer the opportunity for you to earn rewards on purchases, often in the form of crypto. Several have launched in the US. When we checked in early 2022, we could find none available in the UK, though some providers like BlockFi and Nexo are reportedly looking to introduce them. Credit cards are regulated by the UK’s Financial Conduct Authority (FCA), so companies offering such cards would have to be authorised by the FCA first.

Other types of crypto banking products

Here are 3 other types of crypto banking products, though not all are available in the UK:

  • Crypto savings accounts. Crypto savings or interest accounts allow you to earn interest on your cryptocurrency by loaning your stored crypto to other people, generating returns expressed as an APY (annualised percentage yield).
  • Crypto loans. Loans that use your crypto holdings as collateral allow you to access the value of your crypto in a fiat currency without having to sell, trigger a tax event or miss out on future gains.
  • Crypto trading accounts. Many dedicated crypto exchanges allow you to trade GBP for cryptocurrency or even swap one cryptocurrency for another.

Crypto banking in the UK

There are limited crypto banking products currently available in the UK. Uncertainty about UK regulation of cryptocurrencies has made crypto platforms cautious about launching consumer banking products in the UK.

Currently, the primary crypto banking product in the UK is crypto debit cards or crypto prepaid cards. There are several providers including eToro, Wirex and Coinbase that have a card available to UK users.

Nexo is one of the few offering a crypto loan where users can borrow pounds sterling using crypto as their collateral. However, of the other main crypto platforms, there aren’t any others that offer crypto lending to UK residents.

Finally, there are yet to be any crypto credit cards released on the UK market. However, there are reports that some platforms may expand their offerings to UK users in the future.

Custodial vs non-custodial accounts

You may come across the terms custodial and non-custodial when researching platforms, accounts or wallets.

Non-custodial wallets like Coinbase leave you in control of the private keys to your cryptocurrency. You’re the sole owner of your cryptocurrency across transactions on the platform.

Custodial accounts like Nexo require you to hand over your private keys, trusting the platform to act as the custodian for your crypto and manage it on your behalf.

One isn’t necessarily better than the other. It comes down to your preferred level of control and how you want to secure your assets. If you’re new to crypto, you might like the idea of a platform looking out for your cryptocurrency. If you’re a veteran, you may want to retain control of the assets you’ve built.

Do crypto banking services protect your money?

Crypto companies understand the risks associated with their services, and have developed a range of ways to protect your money.

Cold storage

Crypto companies typically allow you to choose between “hot” or “cold” storage of your assets. Hot storage means that your crypto is stored online, where it’s easy for you and the platform to access. Harder to access is cold storage, where your crypto is stored offline, offering deeper protection against hacking and breaches.

Third-party insurance

Crypto isn’t protected by the Financial Services Compensation Scheme (FSCS), so some crypto companies have decided to provide their own safeguards through pooled insurance and partnerships with third parties. For example, Nexo partners with both BitGo and Ledger on an insurance policy through Lloyd’s of London and Arch and Mars that covers a custodian’s assets in the event of a security breach or employee theft.

Bug bounties

Binance and other major platforms support “bug bounty” programmes, which invite the help of ethical hackers and cybersecurity experts to intentionally breach security protections and expose vulnerabilities – helping to strengthen protocols and stay a step ahead of bad guys trying to gain access to your virtual assets.

Is crypto banking regulated in the UK?

This depends on what’s being offered. Some types of banking and credit products (such as credit cards) are regulated, but buying and selling crypto is not – so regulation doesn’t cover everything or every company.

Crypto companies that operate banking services within the UK must be registered with the UK regulator, the FCA, for the purposes of anti-money laundering (AML) checks. It means that crypto exchanges are required to report suspicious activity and have procedures including “know your customer” – or KYC – checks to verify you are who you say you are when you sign up.

But registering with the FCA isn’t the same as being regulated to ensure customers and their money are protected. With crypto banking services, for example, you can’t turn to the Financial Ombudsman if you have a complaint concerning crypto, and your money isn’t covered by the FSCS if the platform goes bust. You could use both of these with a fully licensed bank like NatWest or Monzo.

Services like Ziglu that offer a debit (prepaid) card and operate as an e-money institution have to be authorised by the FCA, and if you have a complaint that concerns pounds sterling, you can use the Financial Ombudsman – but if it’s about crypto, you can’t. Either way, your money isn’t covered by the FSCS.

Crypto and tax

You may be liable for capital gains tax (CGT) on profits from selling crypto assets if your capital gains go above the annual CGT allowance.

This means you’re expected to keep track of any profits. Crypto tax software can make it easier for you to handle taxes associated with any profits gained from cryptocurrency markets by automating the process and keeping track of trades and transactions you make.

Pros and cons of crypto banking

If you own enough cryptocurrency to park it in an account, you’ll be able to take advantage of high returns and rewards. But remember that crypto is a speculative, volatile investment and crypto banking lacks the safeguards you get from a mainstream bank.

Pros

  • Sky-high yields. Some companies advertise interest rates as high as 14.5% APY. Platforms have different requirements for these high return deals, but many specify that you must invest in the platform’s native cryptocurrency to get the max interest.
  • Easy access to your assets. Crypto banking services are partnering with household names like Visa and Mastercard, making it easier for you to spend – and earn rewards on – your crypto.
  • Returns in stablecoin. Many crypto banking services offer products that can help you mitigate crypto volatility by investing in stablecoins – coins pegged to a “stable” fiat currency like GBP or USD. Earning interest on stablecoins may shield you from market volatility, as these types of cryptocurrencies are designed to maintain a value equal to the pegged fiat currency.
  • Access low-interest financing. By offering up your crypto as collateral, you can access loans at lower rates than a traditional bank’s, often without a credit check or ID – and without having to sell your crypto.
  • Minimal credit checks. For now, crypto banking offers an opportunity for the marginally banked and unbanked to access financing based only on the value of their crypto holdings – and not their credit score.

Cons

  • Offers little to no reserves. Crypto services can offer high APYs because they don’t have to keep reserves traditional banks typically need to cover the cost of loan defaults. This enables them to generate a higher return on investment – but also results in less protection if several high-stake loans fail.
  • Not protected by the FSCS. Unlike traditional banking, crypto banking is not covered by the Financial Services Compensation Scheme (FSCS). So if a crypto banking service goes bust or gets hacked, you could lose your cryptocurrency.
  • You might need to give up control. A draw of cryptocurrency is that it’s controlled by whoever holds the private keys to it. Yet some crypto banking services and wallets are custodial accounts that require you to give up control and trust them with your keys.
  • Rates fluctuate with the market. While rates for crypto savings accounts can be high, the value of your earnings can fluctuate with the market. Sharp market movements can leave you unable to react to those changing market conditions.
  • Potential tax to pay. If you sell any crypto assets at a profit and go above the capital gains tax allowance, you’ll need to pay tax. If you receive crypto as income from mining or as pay from an employer, then you will be responsible for keeping records and may need to pay income tax and National Insurance contributions. HMRC might ask to see records if it does a compliance check.

The bottom line

There’s no doubt that using a crypto banking service is more risky than using a mainstream bank, but the returns offered by platforms that hold your crypto are also bigger.

Regulators in the UK want stronger control and oversight of cryptocurrency as it becomes more mainstream. The Bank of England plans to step up talks with its international counterparts on a regulatory regime for cryptocurrency.

What is clear is that cryptocurrency isn’t a fad. We’ll keep you updated on new products as they launch – and the protections and risks that go with them.

Cryptocurrencies aren't regulated in the UK and there's no consumer protection. Your capital is at risk.

Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you.

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