Crypto banks are going to swallow fiat banks in 3 years — or even less

Within a few years, a younger generation of financial services customers are going to be able to walk into a bank and gain access to credit products, savings accounts and investments that can host both crypto and fiat assets. In fact, the inroads that will allow for all of this to happen are already breaking ground.

You probably already know that Kraken, a cryptocurrency exchange based out of San Francisco, is now the first-ever cryptocurrency business in the United States to become a bank. For now, being an officially chartered bank means that Kraken will be able to offer more banking and funding options to existing customers. It also means Kraken Financial is going to be able to operate in multiple jurisdictions without having to deal with state-by-state compliance plans.

Kraken is currently working with Silvergate Bank to offer SWIFT and FedWire funding options to U.S. customers. More and more of these kinds of partnerships will become the status quo in the near future. That’s why now is the time for traditional banks that are lagging behind to start paying attention.

Silvergate Bank is a step ahead of the rest at the moment. The company boasts 880 digital asset companies as clients. Those clients have deposited more than $1.5 billion with the bank. That’s still a small amount of money relative to the market capitalizations of most major banks or even most major cryptocurrencies for that matter. That said, keep in mind that major crypto exchanges Coinbase and Gemini are now customers of JPMorgan, even though CEO Jamie Dimon routinely denounced the value of Bitcoin (BTC) and cryptocurrencies just a few short years ago.

Consumers will soon define a “full service” bank as one that offers financial services in both crypto and fiat. The time to start acquiring the necessary tools of the crypto banking trade is right now. Banks need to start adapting or get left behind. Make no mistake about it.

But what tools do they actually need?

Blockchain forensics tools

A crime scene investigator can use a black light or fingerprint powder to uncover all kinds of evidence. The idea that Bitcoin or blockchains are completely private has been dispelled again and again. In fact, blockchain-based currencies are much more open to investigative methods than fiat currencies. It is certainly possible to uncover the origins of transactions. In order for banks to do that with cryptocurrency, they will need blockchain explorers and risk scoring tools that can go a step further than the current publicly provided services.

Those forensics tools already exist, and they allow investigators to follow digital paper trails across addresses, wallets, transactions, blockchains and other digital entities, using techniques like clustering and heuristics. Companies in this space are developing their own proprietary searching algorithms designed to detect the origins of concealed funds and unmask criminals.

Remember, traditional fiat is still the currency of choice for money laundering professionals. Cryptocurrency is in its nascent days and will emerge as a powerful force in reducing the money laundering risk around the world.

DeFi is not going to be the answer for the average consumer

Make no mistake about it, the decentralized finance sector of cryptocurrency holds virtually endless promise. Yield farming may be all the rage, but the DeFi sector is so much more than that.

DeFi projects can allow you to take technical and fundamental trading advice from other traders and only pay a fee if you make a profit. You can pour your capital into digital investment portfolios without having to pay mutual fund fees that can eat away at hundreds of thousands of dollars worth of your retirement portfolio. Investors can also hold derivatives of their desired cryptos without having to constantly switch between blockchains. These innovations are just the tip of the iceberg. As the market continues to mature, more and more DeFi projects will allow us to do things in the future that we are not even thinking about right now.

There is, however, one fundamental problem with all of this. The average banking customer isn’t going to engage with decentralized finance protocols for decades. Yes, the most avid crypto enthusiast knows enough to dig up the contract address of an ERC-20 token, trade it on decentralized exchanges, and invest that token through lending platforms and liquidity pools.

However, the average person is likely still going to want to talk to a banker from time to time, even if they hold most of their wealth in the form of cryptocurrency. Furthermore, governments around the world are working on their own government-backed cryptocurrencies, which the average consumer will definitely want access to at their bank of choice.

Sooner rather than later

What will happen if banks don’t join the party?

Any bank still approaching cryptocurrency with trepidation over the next 18 months is at risk of finding itself dead in the water at the hands of Kraken and other banks that jump on board and take the plunge.

Now is the time for traditional fiat banks to engage in empowering the individual with greater access to crypto. If they don’t, they will be swept away by the rising tide of cryptocurrencies ripe to reinvent the world’s financial system one way or another.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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