Interest on Your Crypto Holdings: The Latest Insto Lure?

There are, no doubt, myriad reasons for the huge leap in the value of cryptocurrencies, not least that institutions might finally be getting on board. That said, research from Flipside Crypto last year stated that just 2% of accounts owned 95% of bitcoin, so while that could indeed be a signal that larger accounts are coming in, it hardly suggests a broad adoption.

One factor behind the rise of crypto is undoubtedly cheap money, with at or near-zero interest rates continuing in the developed world, cash needs a home. Perhaps the big question for holders of bitcoin is what happens when, perhaps if, the age of easy money ends? Conservative institutions are more likely to settle for an increased return on their cash balances that play with fire, as so many see the crypto market.

The Full FX was interested, therefore, to see that Gemini, the crypto conglomerate founded by the Winklevoss twins, has launched a service that allows US account holders to earn interest on their crypto holdings. The firm says customers “could” earn up to 7.4% APY as interest is paid and compounded daily, although, quite reasonably, interest rates vary for different cryptocurrencies.

On one hand this move could be seen as a lure for institutional investors seeking to get returns on long term balances, but in reality this is likely to be a push to grab more retail investors. The deposits are not protected by the US’ Federal Deposit Insurance Scheme, and as such institutions are likely to shy away, this may be less of an obstacle for retail investors who have, after all, taken the leap into crypto and, probably, found it very rewarding.

By becoming a deposit taking institution alongside its crypto lending vehicle, the question has to be, at what stage do the authorities start to look at, and move to further regulate, companies like Gemini as banks?

The challenge for the authorities will actually be very similar to those seeking to regulate the retail FX market. Several years ago the US started ramping up the regulatory requirements of retail brokers in that jurisdiction, indeed it was followed by other nations. The problem was, is, that not enough nations followed and those retail FX brokers who, to put it kindly, like a “light” regulatory touch, merely found a jurisdiction in which they could operate as before.

Crypto is, above, a global market, so while firms like Gemini, who have set out to build a full service crypto financial model, may be content to stay and be regulated, others with less lofty ambitions may shift. That means there will still be concerns about crypto market structure and behaviour within it, which in turn means the majority of institutions will continue to stay away – at least until their investors start asking why they don’t have even a small proportion of their money invested there.