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..]
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