Gemini Trust, a New York-based cryptocurrency exchange and custodian, has begun offering a savings account to consumers.
The account, which is called Earn, lets clients move their holdings in bitcoin and other cryptocurrencies into interest-bearing accounts. The current rate is 7.4%.
Gemini, which is regulated by the New York State Department of Financial Services and has a money transmitter license in every state, can afford to pay such high rates because it lends the cryptocurrency to institutional borrowers through its lending partner, Genesis Global Capital.
“There's high demand for crypto among institutional borrowers,” Noah Perlman, chief operating officer of Gemini, said ahead of the company's announcement on Tuesday. “This is part of the maturation of the space. You have institutions who need to fund their operations and their own strategies, and as a result they're willing to pay competitive market rates to borrow.”
The new account is the type of “bridge” product cryptocurrency companies are building to try to disrupt and compete with traditional banks.
“We continue to see the creeping normalization of crypto by tailoring existing banking products to the extent possible," said Hans Morris, managing partner of NYCA Partners in New York. "It will be something to watch if noncrypto holders are brought in by the offering of interest accounts.”
Perlman, who worked at Morgan Stanley for 13 years, says Earn is an appealing alternative to a basic checking account or savings account.
“You're always going to have maximalists, in any space,” he said. “And I wouldn't be surprised given the delta between the interest offered on a traditional banking account that you might have consumers who decide to take their entire savings and checking balance and move it to Gemini, to earn the compelling interest. But I would also suspect that you would have people who take a balanced approach. In the old method of putting together a portfolio, you'd have some mix of fixed income, equity and cash. Today investors are adding crypto to that mix.”
But because these accounts are tied to loans collateralized by bitcoin, they’re more akin to securities lending than to deposit banking, pointed out Caitlin Long, founder and CEO of Avanti Bank in Wyoming.
“Interest rates on bitcoin loans are high because bitcoin has high price volatility and not much of it is available for lending,” she said. An estimated 75% to 80% of bitcoin is held in self-custody outside of intermediaries, she said.
“One issue with the bitcoin lending market is that no one knows whether the intermediaries are actually solvent,” Long said. “There’s no financial disclosure and almost no regulatory examination of intermediaries — and most of them are not audited either. So, it’s not possible to do counterparty credit risk analysis in this market. Caveat emptor.”
Added to that risk is the fact that the Earn account isn't insured by the Federal Deposit Insurance Corp. or any other government program or institution.
In its account terms and conditions, Gemini warns that customers’ digital assets will leave Gemini’s custody, “and you accept the risk of loss associated with loan transactions, up to and including total loss of your available digital assets.”
Consumers may not care as much about deposit insurance as they used to, at least for short-term investments, said Brad Leimer, founder of the venture capital and advisory firm Unconventional Ventures in San Francisco.
“A decade and a half of low interest rates have taught a generation that the only way to get returns for savings and investments is to inherently assume added risk,” Leimer said. “Why not be more speculative with the limited funds we have to throw at something like Earn?”
Perlman said Gemini puts safety and security first.
When the cryptocurrency investors Tyler and Cameron Winklevoss started Gemini six years ago, their idea was to create a compliant, regulated, safe and secure platform for cryptocurrency holders to store and manage their digital assets, Perlman said.
“At the time it really was the Wild West in crypto,” Perlman said. Gemini started at around the same time the bitcoin exchange Mt. Gox shut down after millions of bitcoin were stolen from it.
"That narrative has changed over time, although there are still a lot of people in traditional finance who cling to aspects of that narrative," Perlman said. "Gemini is putting regulation first. We’ve always asked for permission, not forgiveness.”
Gemini also recently launched a credit card that accrues crypto rewards.
“The card goes hand in hand with the Earn product in the sense that these offerings further our mission of making crypto mainstream and providing a bridge from traditional finance products to a world of crypto,” Perlman said.
These products will appeal to early adopters and current Gemini customers first, Perlman said.
“Then they will start to attract what I call the crypto-curious and people who are thoughtful about finances, as crypto continues to get more and more mainstream,” he said.
Perlman is starting to see a convergence of crypto companies like Gemini and traditional banks.
“I do see a continued acceptance and recognition by traditional banking regulators and traditional financial institutions that crypto exchanges and platforms that take security regulation seriously are a growing part of the financial ecosystem,” Perlman said. “They will only grow in importance. And you see that in the approach that regulators now have. You see big, traditional public companies allocating some of their treasury to cryptocurrency, so traditional financial planners and banks can no longer ignore the space.”
