Difference between cryptocurrency wallets and bank accounts

Bitcoin is the first cryptocurrency ever conceptualised, first and foremost it offers an alternative monetary system to our economy: a decentralised one. Fiat money is issued and controlled by a centralised team within a government.

In the crypto-economy, governments and central banks have no authority on the issuance of additional currency. Furthermore, certain private banking services have witnessed a drastic decrease in cost, including cross-border payment or access to investment accounts.
Not all financial retail services are available in the crypto-economy, insurance or lending to name a few.

Ownership - Are you in full control of your wealth?

Fiat

Depositing funds into a bank account means trusting a centralised entity (banks) to hold one's wealth.
Banks have the power to freeze accounts, put consumer limits or delay access to funds.

Crypto

In cryptocurrency, there's the flexibility to either

  • Keep full control of capital
  • Trust a third party to store capital

Cold wallet store cryptocurrencies offline whilst online wallets give a similar centralised experience as the banking system. Cold and hot wallets are as secure as the device they are installed on.

Storing cryptocurrencies on online wallets does not mean owning them, but rather owning an IOU.

Immutability - Can you rewind back in time and get a refund?

Fiat

Merchants, banks and consumers can cancel a transaction after payment confirmation.
The current payment infrastructure offers many safety nets in case something goes wrong, such as insurances for stolen cards or the cancel feature on Electronic Payment Terminal.

However, refunds are sometimes not possible in the event of a mistake, especially during interbank wiring.

Crypto

There is no rewinding back once a transaction is signed, verified and confirmed. The blockchain is immutable: there is no way to cancel a transaction. In this sense, the network is non-repudiable.

It is crucial to double check public addresses before confirming transaction as an incorrect address would result in loss of funds.

Security - Are you safe from a digital attack?

Fiat

Card issuers, payment gateways, insurance and merchants are very open to refunding a transaction if something adverse happens. It is not only about merely solving discrepancies but also part of improving customer service.
The fiat economy offers several services against scams, fraud and mistakes.

This being said, wiring cash to an incorrect bank account might result in a loss of money, and cash is always at the mercy of physical attacks.

Crypto

The cryptocurrency market is filled with scams and frauds that target the new comer. For more information, check out our scam article.

The user holds the responsibility to store its cryptocurrencies safely in a digital wallet. As such, wallets are more vulnerable to digital attacks than bank accounts.

Privacy - Can you detach your identity from your financial behaviour?

Fiat

Although cash remains the most private way to transact, it is only suitable for low amounts. On the other hand, electronic payments can handle higher amounts but record the identity of all the stakeholders engaged in the transaction.

Bank transfer leave a trace that can be audited by financial institutions and governments and are vulnerable to hacks and thefts.

Crypto

The Bitcoin blockchain has imperfect knowledge of a user’s identity, meaning public addresses are not easily linked back to an individual’s identity.

Users have the flexibility to detach their financial behaviour from their identity if they want to stay private.

Centralised tools, such as tumbler and mixers, can increase the difficulty of tracing back Bitcoins to an individual. Moreover, privacy-focused cryptocurrencies have recently emerged and can help users achieve full anonymity (Monero for instance).

Transparency - Are you aware of the total supply of money and how it is managed?

Fiat

Only few stakeholders have access to transaction and bank settlement history. Although account audit occurs on a yearly basis, there is no live feedback available for public scrutiny.

The fiat economy is closed-source, only regulators and financial institutions have access to some extent to bank accounts and their transactions.

Crypto

The blockchain is a distributed public ledger that anyone can access at any time which gives full knowledge of all transactions that occurred on the network.

The Bitcoin code, emission rate and blockchain activity is open-source.

Inflation - Is your wealth getting diluted?

Fiat

The current monetary policy is inflationist: the government can print money endlessly. By doing so, the aim is to trigger consumption and keep the rise in prices in a pre-determined target zone. 

Government can inject fresh capital into the economy by purchasing assets from or issuing debt to financial institutions and industrialists. Boosting the economy by creating electronic money is a practice called “quantitative easing”.

There are two drawbacks:

  • Inflation means the value of one monetary unit decreases.
  • Quantitive easing (the act of printing fiat) may benefit more to the higher income segments since governments inject capital by purchasing assets from and issuing debt in bulk to the banking sector.

Crypto

Bitcoin supply is capped at 21 million units: this means it is deflationist (not every cryptocurrency is deflationist). The number of Bitcoins added to the economy every year gets smaller and smaller.

Supply is not influenced by any externalities and not controlled by a centralised authority. In fact, the rate of issuance is transparent and available to anyone.

As Bitcoin’s market penetration is going up, Bitcoins are becoming more and more scarce.

Consumption - How easy is it to issue low-amount transactions?

Fiat

International card issuers such as Visa or MasterCard handle hundreds of millions of transactions per day.Purchasing a good or services is fast, secure and cheap.

  • Speed = in a matter of seconds
  • Fees = 2-5% for merchants and a fee for consumers.

Crypto

A Bitcoin transaction takes 10 minutes to get recorded into a block, verified and added to the blockchain. Not the best scenario for merchants: waiting this amount of time to get the money cleared out creates a considerable risk for them.
On the other hand, clients cannot wait 10 minutes at the till.

However, new cryptocurrencies and blockchain startups have been very innovative in the space and are offering lower transaction time or escrow services in order to solve Bitcoin’s block time issue.

Interbank settlement - How easy is it to issue high amount transactions globally?

Fiat

The current payment technology, SWIFT, can take up to 7 days to execute a payment and massive costs can be incurred. In addition, banks often charge (hidden) fees and commissions on the conversion rate.

When an international transaction occurs, money can be in transit for several days. This is due to interbank settlement processes: the money has to be wired to several banks before arrival.

Crypto

The Bitcoin network is perfect for cross border transactions and settlements. You can transfer value overseas at a minimal cost and very quickly.

  • Speed = Bitcoin 10 min, Ripples
  • Fees = would not go above 10 USD

Law - to what extent are you liable for your financial behaviour?

Fiat

Fiat currencies are considered legal tender, meaning they are legally recognised by public institutions to settle financial obligations between parties.

There are rules to follow when handling fiat money: trespassing them can lead to legal recourse:

  • Pay tax on your income and wealth
  • Abstain from purchasing illegal goods and services
  • Settle financial obligation if contractually agreed upon

Crypto

Depending on the country, Bitcoin and cryptocurrencies have different legal statuses. While some countries like Bangladesh or Bolivia banned the use of Bitcoin, Japan decided in 2017 to declare it as legal tender.

Bitcoin has historically been affiliated with online drug trafficking and money laundering activities because of its privacy features and ease of settling cross-border payments. 

Still, the majority the countries have no solid legal framework put in place for digital currencies. The lack of regulation is somewhat beneficial as it does not hamper any innovation in the industry. However, money laundering activities and illegal transactions might be occurring on the network of well established cryptocurrencies.

In the same way that the Internet was at first unregulated, cryptocurrencies enjoy a grey zone legal status in most countries.