Coinbase’s high-interest savings account rollout raises questions about returns

The cryptocurrency exchange Coinbase is set to launch a savings account paying a 4% interest rate on USDC’s stable deposits, a move that has raised questions about how it is. capable of offering higher returns than those available from banks with such a large margin.

Coinbase’s plan places it on a growing list of exchanges and fintech companies offering interest rates significantly higher than those paid by traditional banks.

While other interest-bearing crypto accounts offer rates of up to 8%, Coinbase says it offers significantly lower risk by lending only to “verified borrowers.” However, its new savings accounts are not protected by the United States Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, unlike most fiat savings accounts. These accounts generally offer interest rates below 1%.

“While high interest rates are attractive, they can come with different levels of risk,” Coinbase said in a blog post. “You may find that your assets are on loan to unidentified third parties and subject to their credit risk, which could result in a total loss of your crypto holdings.”

Speculation among consumers has revolved around how he is able to pay such high returns, especially given the interest rates available at main street banks.

These returns may be related to the fact that the account is for deposits from a stablecoin. Since stablecoins are pegged to gold or a fiat currency – the USDC is pegged to the U.S. dollar – their valuations are generally less volatile than those of other cryptocurrencies, making it easier to manage risk.

Jason Nassios, associate professor at the Center of Policy Studies at Victoria University of Melbourne, said Forkast. News that without knowing the credit scores of Coinbase’s “verified borrowers”, it might be difficult to assess the risk of offering such high interest rates. The fact that an investor’s USDC could be used as collateral to borrow other cryptocurrencies introduced a sequence of counterparty risks into USDC’s lender’s portfolio, he said.

Nassios said the level of risk puts accounts like Coinbase’s latest offering in a league similar to troubled debt funds, and they should be compared to such funds rather than typical savings accounts. Even then, he said, in the absence of credit scores, it would be difficult to tell if the interest rate offered was fair.

“We have no idea of ​​their credit scores and we have no independent assessment of the lending process undertaken by Coinbase,” Nassios said. “This is in stark contrast to the high yielding or distressed debt funds offered by many fund managers, which are often independently reviewed by qualified investment professionals. Without these details, it is difficult to determine if this product is reasonably priced – 4% APY may be too low or fair.

Another possibility is that Coinbase offers a lead product – a product sold at a low price to attract new customers to the business. “By offering a crypto investment tied to the US dollar and offering a reasonably high rate of return – at least for the average and family investor, Coinbase would be able to attract new customers who previously viewed crypto as an asset too. risky, ”said Christoph Breidbach, senior lecturer at the University of Queensland Business School. “Some of these new customers can then get to know this asset class and expand their portfolios to other crypto investments with Coinbase.”

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