Crypto banking: what it is and how it works
Crypto banking offers bank-like services for crypto holders, but your coin balance is not an FDIC-insured deposit. US taxes apply to interest and rewards.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
On this page
- Providers hold coins and issue stablecoins or cards.
- The IRS taxes interest, rewards, and spending.
- Self-custody puts you in control of the keys.
Crypto banking is banking that specializes in cryptocurrencies, such as Custodia Bank in the United States. Custodia Bank obtained a Wyoming state banking charter in 2020.
Is crypto banking FDIC insured?
Usually no, for the coins themselves. FDIC insurance covers deposits at insured banks, not the tokens a platform holds. Partner bank coverage usually reaches only the cash.
How does crypto banking work?
A platform bundles several services in one app. The firm usually holds your coins in custody and earns fees.
- Custody: the firm holds your coins for you.
- Stablecoins: the firm issues a dollar-pegged token.
- Cards: you spend crypto at merchants.
- Loans: the firm lends cash against your coins.
How is crypto banking taxed?
The IRS treats crypto as property, so each event is treated on its own. Income, spending, and buying are not taxed the same way.
Who regulates crypto banking?
No single US agency regulates all of crypto banking, and the rules keep shifting. The Federal Reserve denied Custodia's membership application in January 2023.
- State regulators license money transmission.
- The OCC supervises national banks and trust charters.
- The SEC oversees securities, and the CFTC oversees derivatives.
How is it different from banking?
A traditional bank takes deposits and holds federal deposit insurance. A crypto platform is usually a custodian or a money transmitter that charges fees. In self-custody DeFi, you hold the keys.
Frequently asked questions
Your claim depends on the custody terms and on bankruptcy law. Coins held in custody may not be treated like a bank deposit.
They charge custody, card, and trading fees, and earn money on stablecoin reserves. Custodia Bank used a fee-based model.
Often yes, if the platform allows withdrawals and the coins are not pledged as loan collateral. You send them to a wallet where you control the keys.
