Leading crypto banks such as BlockFi and Nexo are attracting a lot of attention.
But before you rush to transfer your hard-earned savings, theres some important things to be aware of.
First, you oughta realize what these banks are offering interest on.
It’s free, every week, in your inbox.
But despite boasting of zero fees for this facility, the rates are not necessarily the best.
BlockFinotes thatits cost of purchasing crypto may be 1% higher than the market price.
If you save in cryptocurrencies, the interest rates also drop significantly the more you hold.
On BlockFi, for example, the 5% bitcoin rate is only for deposits up to 0.5 bitcoin.
For higher amounts it falls to 2%, and ultimately 0.5%.
Some crypto banks also offer their best rates for interest payments in their own cryptocurrency.
Nexo tokens are not stablecoins, and go up and down in value.
For interest payments in Tether or USDC, the rate is 10%.
Finally, no crypto-bank interest rates are guaranteed for any length of time.
So while quoting an annual rate, it can fluctuate from day to day.
The business model
Nonetheless, the rates are very high.
So how do these banks do it?
Crypto banks seek to safeguard their position in two key ways.
First, by lending out less than they have in deposits.
Second, they make borrowers put up collateral for their loan.
This involves aloan-to-value(LTV) calculation for working out how much collateral is required to secure a loan.
For example, BlockFi reserves the right to liquidate collateral as soon as it reaches 80% LTV.
In good times, this is a business model that can bring significant revenue.
They will also not be liable for any loss or damage incurred as a result.
There has also been some controversy around some stablecoins.
This article byMatthew Shillito, Lecturer in Law,University of Liverpoolis republished fromThe Conversationunder a Creative Commons license.
