A comparison of banks vs. crypto-assets exchanges

Binance, the largest crypto-assets exchange, reported is reportedly enjoying a $446 million profit for FY 2018. The company has often been compared to Deutsche bank, who reported a net profit of $341 million for FY 2018. In Q1 2018, Binance had only 8 months of existence, 200 employees and reported $200 million in profits. Meanwhile Deutsche Bank reported $146 million with 100 000 employees and 148 years of activity. Do you think former DB’s CEO wishes he had invested the $15m Binance raised in their ICO?

Q1 2018 results & stats of Deutsche Bank vs. Binance

Q1 2018 results & stats of Deutsche Bank vs. Binance

Source: BQ Intel

Crypto-exchanges, force or farce for banks?

It is commonly admitted that the democratization of crypto-assets as a medium of exchange and a store of value, should it happen, would dangerously threaten banks. Some banks have been reportedly taking a harsh stance against their clients because of crypto-assets transactions. There are multiple cases where banks sent warning letters to their clients to warn them not to execute transactions with crypto-asset exchanges. Myself I’ve experienced it from a so-called neobank. They usually invoke some compliance policies or terms of use.

Yet another point of view suggests that calling crypto-assets a threat leads to a confusion or a wrong perception of what should or could be done in this new paradigm of crypto-assets: no one controls them like someone would control a mafia gang, or like central banks would control fiat money. Everyone or any organization with an internet access can use them and participate in their governance by connecting to underlying DLTs, often anonymously. How could established financial institution leverage of them to enhance their business, without necessarily trying to replicating them?

Like fiat money, their users need to either transfer them in exchange of goods or services, or swap them against other crypto-assets to access different goods and services. Speculators would typically exchange them against other crypto-assets in their trading activities. The one-stop places to do achieve these basic transactions are crypto-asset exchanges. They are key players in the industry. They make the market. Mostly, crypto-assets slightly resemble banks on some aspects, and remain very different in other aspects.

Sources and uses of funds

Banks basically receive and manage fiat deposits from individuals and organizations. Similarly, crypto-assets exchanges receive and manage crypto-assets deposits from individuals and organizations.

Banks can lend or invest their clients’ deposits to other clients to make profits. Therefore, they manage it with discretion and bear the risk related to managing clients’ funds. In opposite, crypto assets exchanges are not allowed to stack their users’ funds for profits (at least in theory). They bear no investment risks.

Revenue models

Banks can provide financial services to their clients: merchant banking, leasing, mutual funds, venture capital, ATM, credit cards, underwriting, etc. and charge fees, interest rates and commissions to make their sales. In opposite, crypto-assets exchanges do not provide financial services to clients. They simply offer them a trading engine allowing them to trade at their own risks. They charge fees on trading orders to make their revenues. They also charge fees for listing new cryptocurrencies.

Also, banks serve as agents for many operations engaging their customers: collecting incomes, settling invoices, clearing transactions, dealing with foreign exchanges, etc. In opposite, crypto-assets exchanges are not agents in first place. They simply make cryptocurrency markets and allow their clients to access them.

Regulatory constraints

Banks are required to strictly abide by financial regulations like Solvency, IFRS, Bâle, etc. on top of compliances procedures for KYC, AML, CFT, etc. Crypto-assets exchanges are not (yet) subject to most financial regulations that financial institutions deal with.

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