Crypto banking - Get started with CEFI

What you'll learn:

• What is crypto banking: CEFI vs DEFI. 
• The CEFI model vs traditional banking. 
• Popular CEFI providers. 
• Get started with CEFI earning crypto interest or taking a crypto loan

The crypto ecosystem is evolving rapidly, with new services being created that enable you to do more with the cryptocurrency than just holding it. One of the biggest areas of development are crypto banking services. 

Crypto banking services are broadly split into two categories which differ in terms of custody - who is ultimately in control of your funds - and the potential returns you might expect because the risks involved are different.

CEFI (Centralised Finance) - Where a service provider holds custody of your funds and provides familiar banking services such as interest and loans. Lower rates with lower risk.

DEFI (Decentralised Finance) - Where you custody your funds but interact with Smart Contracts which give you access to hybrid banking services such as liquidity provision and yield farming. Higher rates due to higher risk.

This article is focused on getting started with CEFI, while the following article offers an introduction to using DEFI.

If you are confused about the idea of custody, read this article on crypto storage and security, then come back, as it will help make sense of the core distinction between CEFI and DEFI.

Introducing the CEFI Model

CEFI essentially takes familiar elements of retail banking and applies them to cryptocurrency. This element of familiarity means that CEFI is suited to those crypto users who are risk averse and want to earn passive income. CEFI isn’t however, without risk, as we’ll explain.

Things CEFI has in common with traditional banking:

• You can earn interest on your crypto
• You can borrow crypto
• You can get a VISA card to spend crypto
• You can get rewards like cashback in crypto on card purchases
• Higher interest rates can be earned for fixed commitments
• You monitor these services via an App
• There is customer support
• You trust the CEFI provider to look after your funds

How CEFI differs from traditional banking

• Unlike your traditional bank account your funds aren’t insured in any way
• Interest rates aren’t linked to those set by a central bank; the good news is that they are much more competitive but with associated risk
• You have the opportunity to earn interest in a token issued by the CEFI provider
• You can only borrow crypto/fiat using crypto you already own as collateral
• Account creation is far simpler though you still need to provide Proof of Identity
• Terminology is very different

Let’s unpack these differences as they are crucial to understanding the potential appeal of CEFI before we run through the actual steps to getting started.

Security of Funds

When you open a traditional bank account your funds are insured up to a fixed amount. So if you are the victim of fraud or an error by the bank, you should normally get your money back. Similar rules apply to linked services like credit cards. This is all possible because of government regulation and banks themselves insuring funds and maintaining reserves.

If you’ve read other articles on Learn Crypto, you’ll know that a defining characteristic of cryptocurrency - as a new form of internet money - is that there is no trusted intermediary, such as a bank. The functions that a bank might provide, like validating transactions, issuing new money, and updating balances are all managed without a head office, staff or customer service. 

So this means that there is no backstop; even when a CEFI provider takes responsibility (custody) if they get hacked or go bust, their terms and conditions will make it clear that there is no guarantee that they will make good, though credible providers should hold reserves. (Read the story of how Cred collapsed as a cautionary tale).

There are services emerging to offer insurance of funds, but by default this is unlikely to be provided. As you’ll see below, you should take every precaution to vet a CEFI provider in advance, and when using the service, use all the available security features..]

Interest Rates & Platform Tokens

In a separate article about earning passive income we explained how interest rates are set in traditional banking - via a central bank. Crypto doesn’t have a central bank, instead rates are determined by demand. CEFI providers loan out deposited funds charging interest; the greater the demand for borrowing the greater the interest for savers.

This is why interest rates are highest for Stablecoins because the lack of volatility makes them a preferred coin within DEFI. Even better interest rates are offered if you accept the interest in a platform token.

Staking rates may also reflect the arbitrage available to CEFI providers from offering rates to customers that are below the rate they can earn by staking funds directly with Proof of Stake coins.

A platform token is a cryptocurrency created specifically to function within the economy of a specific CEFI provider. 

• By offering interest in the token, it incentivises users to hold it; 
• Higher rates are offered for token deposits.
• Premium interest rates on deposits are offered for staking the token for fixed periods.
• Staking the token can also unlock additional services like cash back on a Visa card or retail rewards.
• The token is traded on exchanges like any other crypto
• Where the CEFI provider also offers exchange services the token can be used e.g. paying trading commission. 
• Token economies are circular and promote Community interaction but there is no guarantee that the value of the token will increase.

Collateralised Crypto Loans

This is less complex than it sounds. If you approach your traditional bank for a loan, they’ll assess your credit history, want a lot of information about your financial circumstances and give you plenty of forms to fill. Loans are either secured against something (a house) or unsecured and reliant on your ability to repay them.

Crypto loans involve much less paperwork but are only available when secured against existing crypto collateral. If for example you own 1 BTC and it is worth €48,000 you could borrow roughly €28,000 against it as a Stablecoin or regular fiat money. 

The relationship between your collateral (worth €48k) and the loan (in this example $28k) is called Loan to Value ratio (LTV)  which is about 58% (28/48).

In addition to the collateral, you’ll also have what is known as a Margin Call. As the price of bitcoin is volatile the value of your collateral might decline. The loan provider won’t want your collateral's value to decline below the value of the loan issued, so the Margin Call is a trigger that says, ‘if your collateral declines in value by 35% you need to provide more collateral, or we’ll start selling it to adjust the LTV’.

You will get a warning, but once that Margin Call level is reached you’ll have to make a decision, and importantly, once you take out a loan the CEFI provider owns the funds, so they don’t need your permission to sell. Nexo’s blog provides more detail about the importance of liquidations.

Why take out a Crypto Loan?

You might be wondering why someone would want to borrow against their crypto, and not just sell it if they need fiat or a Stablecoin? Here are a few reasons why:

Tax efficiency: Selling your crypto in many countries is a taxable event. By taking a loan against it you can realise value without paying the capital gains.

Yield Hunting: Some investors are happy to pay 5% on the loan of a Stablecoin as they feel confident they can earn much higher returns elsewhere e.g in DEFI. They are however, exposed to the risk of liquidation from a sharp drop in the value of their collateral. 

Pay off a Mortgage: If you have a fiat liability, like a Mortgage, you can pay it off without selling your crypto by taking out a loan, thereby avoiding the tax.

Pay Interest With Appreciation: Many people want to realise value from their crypto but don’t want to part with it. A loan is a compromise as the interest can be paid from any appreciation in your collateral, leaving you free to spend what you borrowed.

Popular CEFI Providers

These are a selection of popular providers. Learn Crypto doesn't endorse any of them. They all have active communities on Reddit, Twitter and Medium where we encourage you to DYOR if you consider using any of them.

Their interest rates are likely to be the biggest differentiator but be aware that some rates are offered as a way to attract customers, rather than reflecting the level of demand to borrow. There have been cases across numerous providers where rates have been reduced significantly and at short notice.

Nexo.io - Offers crypto interest and loans on 18 cryptocurrencies and main fiat currencies. Access a credit line in fiat or Stablecoin. Has a platform token (Nexo) which you can stake for preferential rates, and is paid out as a dividend to Nexo holders/users. A Nexo card is coming soon where you can spend your credit line and get cashback in Nexo tokens. Features a built-in exchange to convert or buy crypto.

Crypto.com - Offers interest on crypto deposits through soft staking (no fixed terms) or hard staking (180 day term). You can borrow against your crypto getting a credit line as a Stablecoin, and get a Visa pre-paid card offering cashback and perks (Netlfix, Spotify, Airport Lounge Access) depending on how much of their Token Platform (CRO) you are prepared to stake. Hard Staking gives access to features such as the Syndicate (buy from a pool of a given crypto at a discounted rate) or Supercharger, where you deposit CRO and earn extra interest in a given crypto. CEFI is managed via an App but is part of a wide array of Crypto.com products including an Exchange, NFT Platform and DEFI Wallet.

Celsius - Offers crypto deposits and loans with preferential rates for interest earned/paid in CEL (their Platform Token). Doesn't offer an Exchange service or pre-paid card right now. CEFI services managed via an App. 

BlockFi - Part of the Gemini Group founded by the Winklevoss twins. Offers crypto interest and loans but unlike the providers above, doesn't use a token model. Has a waiting list for a crypto rewards Visa card and offers an exchange service for converting or buying crypto.

Steps to Get Started with CEFI

Now you should have enough information to understand how CEFI works, here are the steps to get started. Decide what is important to you and DYOR (do you own research). 

You might just want to earn passive interest, get the best cash back deals, get interest on a specific cryptocurrency or the best loan deal. Think about what matters most and research the providers. Coinmarketcap and Coingecko both compare available rates, but other sites are available.

Be sure to check that your country is serviced as CEFI providers have to follow local regulations.

How to earn Passive Interest with no lock-up aka Soft Staking

If you are simply after passive interest on your crypto here is a basic guide:

1. Once you’ve chosen the CEFI provider scout around for promo codes as most services offer a new customer incentive. Read the terms which will involve a minimum deposit.
2. Go to the Playstore or Appstore and be sure to find the official App. Passive Interest can be managed via your Mobile.
3. Follow the registration process which will require proof of identity such as Passport, Driver’s License or National Identity card.
4. Choose a strong password, unique to the service; use a secure email address.
5. Set up as many security features as possible: 2 Factor Authentication, Biometrics. Make sure to Back Up your 2FA codes in case you lose your phone. Crypto.com use an anti-phishing code for emails.
6. Once you’ve created your account decide whether to earn interest in the platform token (if applicable) which will offer a premium but familiarise yourself with the risks of it declining in value..
7. Follow the navigation to deposit the crypto you want to earn interest on. Use the copy/paste feature to get the address to send your coins to. Be very careful to include a Memo if required (XRP, XLM etc).
8. Go to the wallet or exchange that is holding your crypto. Using the CEFI deposit address, start by depositing a small amount just to be sure. Once that arrives you can be confident of sending larger amounts.
9. If you don’t have crypto most CEFI services allow you to buy it within the App, but be aware of the fees associated with using a card.
10. Familiarise yourself with the App functions, especially Withdrawal features. Most CEFI providers will require you to create whitelisted Withdrawal addresses. This is a security feature which means adding/changing a Withdrawal address can take 24hrs, but if you want quick access and don’t set one up in advance, you are stuck.
11. Find your Referral code which enables you to refer other users and earn some additional crypto.
12. If you like getting weekly updates on the interest you’ve earned enable Email Communication or In App Messaging.

How to earn Passive Interest with a lock-up period aka Hard Staking

Certain CEFI providers will offer the opportunity to earn more interest if you are prepared to lock up your funds for a fixed period and stake their Token Platform. The interest earned will be relative to the amount you stake.

• Follow the steps above for account creation. 
• Decide the level of staking you are prepared to make and purchase the platform tokens via the App. In the example image it is CRO, the platform token for Crypto.com.
• You’ll then need to carefully read and agree to the Hard Staking terms and lock-up period. Read carefully as once agreed it cannot be undone, even if the token value plummets.
• Monitor the interest earned & wait until the staking period ends.

How to take Out A Crypto Backed Loan

1. Research the rates charged on loans; sites like Coingecko and Coinmarketcap are helpful.
2. Decide what crypto collateral you want to provide & what fiat/Stablecoin you want to borrow.
3. Use an onsite tool to calculate how much you can borrow against your crypto..
4. You can reduce the interest rate by holding the Platform Token, the more you own, the lower the rate, but that depends on your circumstances & risk appetite.
5. Carefully read the terms and conditions & the FAQs to understand exactly how the loan works. Pay attention to the LTV level & how the Margin Call/Liquidation works.
6. If you’re comfortable you’ll need to create an account (as above).
7. Deposit your crypto collateral to the address provided - this will give you access to a Credit Line. You don’t have to use the whole amount of credit, and are only charged interest once you withdraw.
8. You can pay your interest in Fiat or Crypto, or a combination, and sell some of your collateral - if its value has increased - to cover the interest.
9. If the value of your collateral declines below an agreed level you’ll get a warning about the required action.

Future Of Crypto Banking

CEFI is one of the fastest growing areas of crypto as the large numbers of new crypto holders realise that there are familiar banking services on offer, with very attractive rates compared to their traditional savings accounts.

Despite this growth the sector is relatively new, and because CEFI services are custodial - you aren't in control of your private keys - their suitability will depend on your risk appetite. If you are comfortable with risk and want to explore the opportunities for even great returns then the next article explaining how to get started with DEFI will explain how.

The risks are highlighted by the view taken by regulators in the US that CEFI crypto providers are actually selling securities. The potential impact on customers isn't known, but these risks should be considered.