Are Crypto Interest Savings Accounts Safe?

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The interest rates offered by crypto savings accounts are enough to tempt even the most traditional investor away from their bank, but is it worth the risk?

With headline rates of up to 12% on crypto and stablecoins, and even 5-6% on cash such as GBP, it’s becoming increasingly difficult to ignore these DeFi offerings, especially as bank rates are rarely above 0.5%.

But should you take the plunge in the hunt for better returns, and if you’re looking to earn interest on crypto in the UK, are these accounts safe to use or regulated?

Platforms such as Nexo are among the biggest names in the high interest crypto savings, loans and wallets space right now, but there are many others vying for your business.

Related posts: Nexo review

Before signing up, it’s important to highlight a couple of key differences between these new, disruptive crypto accounts and the traditional high street banks.

Many of these differences mean increased risk, but there’s the potential for greater rewards – an often-repeated mantra in the investing world.

The risks of crypto interest accounts include:

• The crypto space is still largely unregulated, but reputable companies still fall under various regulatory umbrellas, such as being registered and licensed by the Financial Conduct Authority in the UK.
• The method of saving you choose – crypto, stablecoin or fiat currency – will determine how much market volatility your money is exposed to. The £10 worth of interest paid in Bitcoin might be worth £7.50 in a week’s time. Equally, it might be worth £12.50.
• Even if you stick to fiat deposits there’s a risk that the companies themselves could experience difficulties if there’s a major upheaval in the crypto markets.
• Crypto savings accounts make their money by offering easy access to loans which in itself has potential risks. Counter-party risk could apply if there is a sudden wave of defaults from borrowers. The sub-prime housing market and subsequent global financial crisis highlights is an example of this.
• In the UK, your crypto savings account deposits are not covered by the £85,000 per institution Financial Services Compensation Scheme protection. (The US equivalent is the Federal Deposit Insurance Corporation which covers $250,000 per depositor).
• By moving your crypto assets to an interest earning wallet, you effectively lose control of your coins because you relinquish your private and public keys. This exposes you to the risk of someone taking control of your coins. The adage ‘not your keys not your coins’ applies here.
• Cryptocurrencies are decentralised, meaning there’s no middleman. On the one hand, this liberates people but on the other hand it means there’s no legal recourse if your funds get lost or stolen.

Crypto savings account – what’s the catch?

The long list of risks above shouldn’t necessarily put you off and the surge of people signing up for these accounts demonstrates their appeal.

Interest rates are still incredibly low meaning many people are seeing their savings pots dwindle once you factor in the effect of inflation.

The potential for much higher returns is extremely appealing and that’s before you factor in the possibility that the underling crypto might increase in value as well.

It’s important to remember that many mainstream financial products come with associated risks as well – look at shares for example. Any experienced trader will have a horror story to tell about buying a hotly tipped stock only to watch it tank within weeks.

Many people are automatically fearful of crypto because its new, they don’t understand it and it threatens to upend the standard model of finance that they’re accustomed to.

So there’s no catch as such; it’s just that interest bearing crypto accounts are seen as far riskier than other methods of saving.

How to choose a crypto savings account

Just like with any traditional financial product, you should always thoroughly research the companies and their legitimacy before you involve yourself with them.

Is the platform well-established? Are there many reviews from trustworthy sources? Do the returns sound too good to be true or much higher than other comparable platforms? Are there scam warnings from Reddit users?

These are all things to consider before you part with your crypto. However, many crypto companies are well-established and are reviewed well.

BlockFi, for example, was founded in 2017, and Nexo in 2018.

While these companies might seem quite new, the entire world of finance has been disrupted in many ways in recent years, with dozens of mainstream app-based pension and investment services springing up.

Of course you should never invest more than you’re willing to lose as crypto is far from a safe asset class.

Diversification is key here – if you’re interested in crypto savings accounts you should only allocate a portion of your portfolio to them.

That way if the company fails or is hacked and you lose your deposit it won’t materially impact your life.

As with all investing, never bet your house!

What protections are in place for crypto savings?

One account that proudly boasts about its insurance is Nexo.

It carries some $375 million of insurance on custodial assets, but this is to protect customers against commercial crime, such as a hacking attack or employee theft, not any losses if the company itself is jeopardised.

BlockFi is also keen to stress the safety of deposits, stating that the majority of its loans are over collateralised, ie the assets backing the loan are worth more than the loan itself. Similar statements have been made by Nexo executives as well.

Mistakes do happen as well. Recently a ‘fat finger’ error led to several BlockFi clients receiving 700 Bitcoins in their accounts instead of 700 Gemini Dollars (GUSD), a stablecoin pegged to the US Dollar.

At the time, BlockFi said that around 100 clients were able to access the deposits, which were part of a trading promotion, and that it left them with an exposure of around US $10 million.

BlockFi insisted that the mistake, which left some customers millionaires for around 3 hours, never put client funds at risk and did not significantly impact its reserves.

To put this into perspective, other non-crypto mainstream financial firms occasionally make errors as well, and ATMs have been known to suffer from technical issues.

How to open a crypto savings account

Opening a crypto account is very simple and is much quicker than opening a bank account.

With the accounts we’ve mentioned above, you’ll need to give your personal details and provide photo ID such as a passport or driving licence.

You’ll need to proceed through KYC/AML checks before your account is approved, but all being well you should be up-and-running within an hour.

Once open, you’ll need to deposit crypto from another source, such as an exchange like Coinbase or your crypto wallet.

However, an increasing number of apps are allowing customers to buy crypto directly on their platform with debit and credit cards or bank transfers.

Interest will start accruing shortly afterwards and will be added to your account according to the platform’s payment schedule.

BlockFi pays – and compounds – interest monthly, while Nexo adds it – and compounds it – to your account on a daily basis.

Conclusion

If you’re happy with risk, then a crypto savings account might be a suitable home for a portion of your portfolio.

The rates are undeniably tempting plus you’ll also gain exposure to the crypto market if you haven’t done so already.

It remains to be seen how crypto savings and loan companies will fare over the long term, but in years to come they might be as common as any other type of savings account.