From Cryptocurrency to Cash: How to Bank Your Digital Coin
This article provides information for educational purposes. NerdWallet does not offer advisory or brokerage services, nor does it recommend specific investments, including stocks, securities or cryptocurrencies.
Cryptocurrency, the blockchain-based digital currency that has captured the interest of investors and financial service firms alike, has a challenging problem. It can be hard to actually spend this currency like you would regular money. But there are new services on the horizon that could help people use bitcoin and other digital coins in more mainstream ways for their day-to-day finances.
Here’s a look at how to use these banking-style services for cryptocurrency, as well as their benefits and barriers.
What is cryptocurrency banking?
The term crypto banking could be considered a misnomer, since the exchange companies and firms that offer these services aren’t technically banks, but it generally refers to the ways in which consumers can manage their cryptocurrency balances. At this stage, this kind of banking mostly just allows people to hold their funds in a digital wallet or spend it like they would spend traditional money.
Benefits of cryptocurrency banking
At this time, the main benefit of this kind of banking is cryptocurrency debit cards. They allow you to use your digital coin balance like any other currency to make everyday purchases or withdraw it as cash instead of keeping it as an investment.
Before these debit cards were available, you could spend your cryptocurrency only at retailers that chose to accept it directly or sell it in exchange for dollars. Now, financial technology firms are partnering with chartered banks and/or debit card issuers to offer these cards, using their partner’s logistical and regulatory framework to automatically sell your cryptocurrency behind the scenes, converting it into dollars and allowing retailers to accept it. This means that your digital funds are accepted wherever many regular debit cards are.
Barriers of cryptocurrency banking
Perhaps the biggest barrier to lending and spending cryptocurrency is how volatile it is. It’s the same barrier to investing in it: To hold cryptocurrency, you have to accept that “if your coin falls, you could lose a lot of money,” says Francisco Alvarez-Evangelista, a research associate at the Aite-Novarica Group, a financial services analysis firm.
Many banks rely on the stable value of currency in order to lend, borrow or earn interest on money, but it’s not possible, at this time, to do those things with cryptocurrency in a way that’s as stable or safe as with traditional currency.
And to spend your digital coin, you have to accept the risk that its value could go up after you spend it, since your transactions are based on the real-world value of your coin as it exists at that moment. For example, if the value of your cryptocurrency doubled after you bought a $5 sandwich, that means it effectively cost you $10. But the value could also go down, making previous purchases a good deal.
Another barrier to consider is that regulators are still evaluating cryptocurrency fintechs. The U.S. Securities and Exchange Commission recently announced that it was going to potentially sue Coinbase, one of the most well-known exchange firms, for offering a new lending product, and Coinbase has since canceled the product launch.
Consumers should also know that using a cryptocurrency debit card is considered a taxable event by the Internal Revenue Service, since the cardholder is technically selling cryptocurrency as they make transactions with their debit card. Some card issuers may automatically generate 1099 forms for their customers to use when filing taxes, but the consumer is still responsible for keeping track of their tax liability.
How to try cryptocurrency banking
To start using these kinds of banking services, you must first purchase cryptocurrency, such as bitcoin, litecoin, ether or any other currency that you would like to invest in. Cash App, Coinbase and PayPal are just a few companies with apps that have made it easier to purchase and sell cryptocurrency, even in small amounts, and store it in a digital wallet.
If you want to spend your balance easily, you’ll need to open an account with a firm that offers cryptocurrency debit cards and uses the kind of digital currency you own. Coinbase, for one, has a special debit card that lets customers spend any Coinbase assets they own and earn cryptocurrency rewards, but there’s currently a waitlist for new customers. BitPay, another firm, offers a prepaid Mastercard debit card that customers can use to spend their digital currency. There are others, but it’s not a widespread bank offering.
In the future, cryptocurrency could have the potential to be a source of peer-to-peer loans, where individuals can quickly and securely process loans to each other, according to research from CB Insights. It’s a huge area of untapped potential but for right now, the world of cryptocurrency banking is limited to a small pool of players with some very new products and services.
This article was written by NerdWallet and was originally published by The Associated Press. The author held no positions in the aforementioned securities at the original time of publication.
More From NerdWallet