I don’t understand how or why any digital currency is converted to bank currency. I thought the entire point of crypto was to operate autonomously from the global banking system. Why are banks paying out so much to crypto valuation?
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Even though Cryptocurrency is meant to be a currency, in practice, it’s helpful to think of it like gold.
People generally agree that gold has value (like crypto), its value and supply is independent of any government entity (like crypto, unlike regular currency), it’s value doesn’t necessarily decrease over time due to inflation (like crypto, unlike regular currency), and it’s a way to store wealth outside of banks and financial institutions (i.e., you can bury gold bars or a hard drive holding crypto in your backyard).
The issue with gold is that you can’t walk into a store and use gold to buy things – you need currency. You can’t pay taxes in gold, and if you’re a company that runs a hold exchange, you can’t pay your employees in gold. At some point, you need to be able to convert gold to regular currency (or, you need to borrow regular currency from a bank) to operate. Until you can walk into most stores and pay in crypto (which is a long way off, imo), you’ll need some mechanism to convert crypto to normal currency – banks provide that mechanism.
Crypto only has value because people believe it does. It only has value when people are willing to exchange it for real-world goods and services. ANY money only has value when people are willing to exchange it for goods and services. Why is BTC worth $22.8k CDN? because some idiot is willing to part with 22 thousand bucks worth of goods and services in exchange for one. As soon as people find they can’t exchange these cryptos for anything of worth, their value will plummet (more than it already has).
Crypto was supposed to be cool and fluid and autonomous of the global banking system. But as the FTX/Alamada collapse has shown, perhaps a complete lack of regulation isn’t the cool beans that crypto bros would have you believe.
Im not super plugged into the crypto space anymore, but I highly doubt that any real world legitimate bank has any significant crypto holdings – or if they do, its purely in a speculative fashion – i.e. its a bet, just like derivatives trading – could blow up big and make lots of money, or it could go poof and its all lost. Like, if you bought 1000 BTC back when it was only $100 USD and you didn’t cash out when it was like, $48k USD two years ago at its peak, you might as well just hold onto it to see if it will recover at all. But I doubt we’ll ever see BTC ever get back to $48k USD again. Not until you can rock into a Safeway and buy your groceries with BTC or ETH. Crypto still needs to reach market availability saturation. Yeah, some 7-11s have BTC ATMs but it needs to be universally ubiquitous.
If a real brick and mortar bank offers any crypto services like a wallet to fiat currency exchange, its purely as a product/feature differentiator to lure and keep customers. Easy to sign up the young cryptobros to buy a car loan or a house mortgage when you already host their BTC wallet.
I think perhaps maybe you’re reading on all these other exchanges trying to inject money into Alamada/FTX to prevent its collapse? Those aren’t real banks, those simply crypto exchanges. They don’t hold any real assets, all of their own wealth (i.e. the transaction costs) is itself held in crypto and if the value of crypto tanks tomorrow, they’re basically kaput. Whenever they want to pay the hosting bills or their employees they have to either convince those people to take crypto as payment (which if I were Amazon Web Services I’d be like “absolutely not – we can’t use Doge or ETH to pay our electricity and computer providers”) or convert crypto to real USD or CDN or whatever.
But there will come a time, and that right sooneth I think, where any exchange that handles USD/$real$ to crypto transactions will simply run out of $real$ cash holdings to exchange crypto FOR as everyone seeks to find an exit from the crypto space.
Are you asking, “why do banks bother to participate at all?”
I’m not sure if that is what you’re asking.
If it is, my bet is that if Bank ABC doesn’t exchange crypto for currency, then Bank XYZ will be happy to do so, for a fee. They’ll also require that the customer have an account at that bank.
Basically, a bank would lose business to other banks, if it didn’t offer crypto exchange.
Banks that do offer it, probably protect themselves, by offloading the crypto as soon as they get it from customers. They know the risks, they don’t want to be caught with worthless crypto.
>I don’t understand how or why any digital currency is converted to bank currency.
Generally, this is done at a “centralized” or “custodial” exchange (CEX), which works essentially like any brokerage. You open an account on one, and that account consists of various “wallets” for your* crypto, as well as a cash account. You can sell your crypto in exchange for credit in your cash account, and then transfer that cash out however you normally would (usually with an ACH transfer). Many CEX’s also offer debit cards, which you can load with either your cash account or your crypto (or more specifically, you trade in your crypto for its present cash value on the card).
(* – it’s not really “your” crypto since the exchange has custody of these funds)
>I thought the entire point of crypto was to operate autonomously from the global banking system.
If you ask 100 different cryptobros what the “point” of crypto is, you’ll get 100 different answers. Having access to financial infrastructure *outside* of the traditional consumer finance is surely a goal of crypto for most people, and it’s a goal that has already been satisfied to a significant degree.
But the overwhelming majority of cryptobros *don’t* want to live in a world that’s *just* crypto. They need a way to offramp their crypto into more widely usable fiat (and they need the reverse as well). This is perhaps the main function that CEX’s have–to service the flow of capital from traditional financial institutions to the crypto market. They can make this profitable by charging fees and earning interest on deposits.
>Why are banks paying out so much to crypto valuation?
Generally, it’s not the banks who are swapping cash for crypto. That’s done by the CEX’s.
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