After years of watching from the sidelines, traditional banks like the Commonwealth Bank have taken steps to offer customers the ability to buy, sell and hold crypto assets. As the saying goes – this is good for crypto. A traditional banking giant ‘opening’ up to digital assets can only be a good thing for their mainstream adoption. The inverse is also true.

Crypto exchanges, like Kraken, can become banks too. In fact, in the US Kraken is preparing to launch its own bank after being the first crypto exchange to receive a special purpose bank charter (SPDI) in 2020. This charter will allow Kraken to launch digital-first traditional and crypto banking products, with cryptocurrencies represented as first-class citizens.

This news may naturally trigger some questions given that cryptocurrency is widely considered as a rebuttal to the centralised nature of finance. While the original vision of Bitcoin took aim at many of the conventions of traditional finance such as fiat currency devaluation and the centralised nature of financial institutions, it doesn’t mean all banks are antithetical to cryptocurrency.

We will need bank-like institutions in our lives for many things. Safekeeping of digitised currency (blockchain or fiat) is vital to the smooth functioning of any economy. The ability to easily and safely access stored funds for transactions is another pillar of mainstream economic health.

A ‘crypto bank’ is almost certainly going to offer these basic traditional banking services. It’s when it comes to what else they could bring that it gets truly interesting. They’re fundamentally different from current banks because they were built on cutting edge technology and have a modern mission. For Kraken Bank, that’s to promote the adoption of digital assets for financial freedom.

Crypto banks will sit at the nexus between the ever expanding cryptocurrency industry and the near $10 trillion-dollar global financial services sector. They will become the trusted bridges between the crypto economy of the future and today’s existing financial ecosystem.

This means financial products that make sense for cryptocurrency investors. Right now, it’s not easy to seamlessly convert cash to crypto or to get paid in digital assets. Utilising margin on digital assets is also difficult. This situation doesn’t have to be the case, and is a reflection of the digital asset space lacking knowledgeable lending institutions, like a crypto bank.

In time, we could see crypto banks start to really challenge some of the fundamentals of what we expect from banks. Wire transfer service fees could be dramatically cut, greater return can be achieved through staking than simply accruing via interest. The way traditional banks monetise their services has been unquestioned for decades (with the notable exception of ATM fees), it will be fascinating to see how they, and the public, react to a different model.

Even if you aren’t interested in digital assets, you should be excited about the prospect of competition in the traditional banking space. Especially when that competition can fund itself in completely different ways to the status quo – Kraken Bank will not use fractional reserve banking. That means the old system of only maintaining a small fraction of the overall balance sheet, then lending out the rest, isn’t in the Kraken Bank playbook.

The insolvency risks of traditional banking are what made the 2008-era so reputationally damaging for them. In a normal competitive market, you would expect to see challengers come that address the problem. It has taken a while, but it looks like this is finally coming via the crypto banks.

2022 has already been a wild ride in finance. Now we’re going to start to see a lot of the lines blurred between ‘traditional’ and ‘modern’ finance. The Big four banks finally offering digital asset access, and cryptocurrency exchanges becoming banks.

For the first time in finance in decades there’s serious, co-ordinated competition to the status quo. It might not be the decentralised dream of Satoshi Nakamoto, but it’s a momentous step in the right direction.

This article was developed in collaboration with Kraken, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

Read MoreCryptocurrency

You might be interested in