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Here’s how crypto savings accounts are taking on the banks

Posted: 19 May 2022 3:00 pm
News
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A new generation of fintechs are offering Australians more yield on their capital.



Sponsored by Block Earner. The Australian Fintech helping users earn 7% fixed yield via its Block Earner Lend service & up to 18% variable annual yield via its DeFi Access service. App + website. T&Cs apply. Power up your money without the tech hurdles. Backers include Coinbase Ventures.

Disclaimer: This article is sponsored by Block Earner, but the views expressed are Finder's. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

High interest saving accounts in Australia are suffering. Only 10 years ago, the average Aussie could easily find an account that offered interest rates of 5–6%.

Research by Finder shows that the average interest rate for Australian savings accounts dropped to 1.16% in 2021, driven by a historically low cash rate.

With inflation currently running at 5.1%, the purchasing power of money kept in a savings account is effectively declining. This is further worsened by the increasing cost of everyday goods and services.

Despite this, most of us still need to keep cash in a savings account. It's how we pay for everyday things like groceries, as well as save for larger purchases like a deposit on a house.

Fortunately, Australians have another choice thanks to cryptocurrency.

When people hear the word cryptocurrency, their first thought is often Bitcoin. The reality is the digital asset industry has expanded far beyond Bitcoin and now offers a number of alternatives to traditional savings accounts.

This includes stablecoins, a category of cryptocurrencies that are typically pegged to the value of a national currency such as AUD or USD. For instance a US-dollar stablecoin such as USDC is intended to equate to the value of US$1 dollar. Stablecoins have already found a home within the lending and borrowing market, meaning you can deposit stablecoins into crypto saving accounts in return for regular yield payments.

The catch though is that these crypto savings accounts are not insured or backed by the government in the same way a traditional bank savings account is, and lack the associated consumer protections. Furthermore, they carry a unique set of risks related to cryptocurrency markets and blockchain technology. But for those willing to test the frontiers of finance, they offer the opportunity to earn a passive income using assets pegged to currencies like AUD and USD.

One such service is Block Earner, a new Australia-based fintech that offers a 7% fixed or a 2-18% variable annual return. It works by converting your AUD into USDC stablecoins which are then deposited into lending platforms to generate a yield.

Block Earner does this by facilitating access to Decentralised Finance (DeFi) services such as Aave and Compound. These services are used to generate yield by connecting borrowers and lenders via the blockchain. Deposits are lent to borrowers, who pay an annualised yield on the stablecoins borrowed.

Let's take a look at how the returns from a service like Block Earner stack up against your traditional bank savings account, and then weigh up the pros and cons.



Interest rates compared

The savings accounts offered by the Big Four banks at the time of writing (May, 2022) are:

  • Commonwealth Bank offers up to 0.45% p.a. on certain savings accounts and up to 2.25% p.a. for term deposits.
  • NAB offers up to 0.50% p.a. across its 2 savings accounts products.
  • ANZ offers up to 0.40% p.a. across its savings accounts and up to 0.20% p.a. for term deposits.
  • Westpac offers up to 0.70% p.a through its savings accounts and up to 2% on combined savings accounts.

The maximum rate typically requires additional criteria to be met, or is only offered for a limited time. Accounts then fall back to the standard variable rate, which is only as high as 0.05% across the majority of savings accounts offered by the Big Four, with some accounts offering a base rate of only 0.01%. Westpac goes a little further with variable base rates of 0.15% and 0.25% through its Life savings and Bump savings accounts, respectively.

Some Australian banks offer accounts with rates between 1 and 3.5%, but they may have requirements such as age restrictions, high minimum monthly contributions, withdrawal restrictions or hard caps on the amount you can deposit, after which the rates drop.

Putting that all together, a Finder survey of 604 Australians showed that in 2021 the average cash savings rate for Australians was 1.16%.

Using this rate of 1.16%, let's see how much the average Australian would earn on their savings.

Yearly returns

According to Finder's latest research, Australians saved an average of $759 per month in 2021.

Using the average interest rate of 1.16% p.a. compounded monthly, you would earn approximately $49 in interest in an entire year if you started from zero and topped up $759 per month.

In comparison, if you deposited that same amount into Block Earner's fixed yield account you would walk away with roughly $293 in earnings for the same period. Block Earner does charge a fee when you convert your cash into USDC and your earnings back into Australian dollars, which varies depending on market conditions and is shown when you make a transaction.

One year isn't long for a savings account though, so let's take a look at how that would play out over a longer time frame.

This graph does not reflect the unique set of risks in cryptocurrency market products. See below for pros and cons.

If you took those same amounts and saved for 5 years instead of 1 year, you would earn approximately the following with each account:

  • Average cash savings account: ~$1,323
  • Block Earner fixed yield account: ~$8,799

Thanks to compounding returns, the difference between each account becomes more prominent over longer time horizons. Block Earner also offers a variable yield account which ranges from 2-18%, but does come with the risk of a variable return.

While the benefits are clear in terms of savings, high-yield products typically come with more risk, and this is true for digital-currency based yield accounts. Let's take a closer look at how it all works and examine some of the unique risks involved.

How do digital asset-based accounts work?

Broadly speaking, digital currency-based services facilitate lending and borrowing, as an alternative to money markets in traditional finance. Users deposit funds onto the platform to purchase cryptocurrency, which are then issued as loans to borrowers, including other financial services, businesses and professional traders. Borrowers pay a relatively high fee for the privilege, part of which is then passed on to the lender as yield payments.

The most common use for these funds is lending and borrowing services.

These services may distribute funds to individual borrowers or use them to contribute to decentralised "liquidity pools" which facilitate instant transactions between different types of digital currencies.

By their nature, digital currency-powered lending platforms are deeply security conscious. Given that borrowers can be anonymous, platforms like Aave (among those used by Block Earner to generate yield) require that borrowers over-collateralise their loans, meaning they must deposit assets worth more than the amount being borrowed. For instance, for some assets on Aave users need to deposit approximately $2,000 worth of assets to borrow $1,000 of value. If the value of the borrower's assets drops below a certain threshold, then the system automatically sells the assets to protect lenders and ensure that the loan can be repaid.

This automated system of balancing the needs of borrowers and lenders, in a decentralised and pseudonymous fashion, is unique to digital assets and part of why users can find much higher return than in traditional finance.

Block Earner bridges the gap between these decentralised services and traditional finance, allowing everyday Australians to access the benefits without needing to navigate the complex technology involved. Instead, the process is as simple as opening a Block Earner account and linking your bank account. Block Earner then converts your funds into a US-dollar stablecoin which is deposited into these decentralised lending pools to earn yield.

But keep in mind that growing your wealth in this way does involve some unique risks.

Risks of crypto savings accounts

Crypto savings accounts may offer attractive returns, but they are not without risks. While platforms such as Block Earner present easy access to the world of crypto, they are still much riskier than a traditional cash savings account due to a number of factors.

Insurance

Australian savings accounts tied to banks are insured by the Financial Claims Scheme (FCS) – a government scheme that protects up to $250k of cash per account holder. You will be covered in the event your money is stolen, lost to a borrower or the bank declares bankruptcy.

Crypto savings accounts do not have the same security guarantee from the government, but they're not all leaving their users unprotected either. Both Aave and Compound – which are used by Block Earner – require that borrowers must over-collaterlise their loans. This means they must deposit more assets than they are borrowing. If the market value of these assets declines, then they will be automatically sold-off to protect the lender and provide repayment.

Smart contracts

Another unique risk of blockchain based services like Aave and Compound is smart contract risk. Smart contracts are a type of software which are used to automate lending and borrowing on these platforms, removing the need for an intermediary like a bank employee. Like all software, smart contracts are vulnerable to poor programming and hacks.

To help protect against smart contract risk, both platforms used by Block Earner are regularly audited by third party companies to mitigate the risk of hacks. Aave has an additional safety protocol called the Safety Module which is a fund intended to protect lenders in the case of several possible events such as hacking.

Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Foreign exchange

Block Earner converts your AUD to US-dollar stablecoins, which means you are exposed to the price fluctuations of the US dollar. You are also charged a fee for currency conversion which is included in the exchange rate when you make a deposit or withdrawal.

New to market

Cryptocurrency-based savings accounts are a very new industry in Australia and carry the innate risks associated with any fledgling industry. Because of this, it is important to always perform due diligence on a business before you hand over your money. Reading customer reviews, terms and conditions and even the development team's past projects is a good starting point.

Other risks

There is still a lot of uncertainty in the public around digital assets, and much of this is due to the fear of being hacked. While this fear is not necessarily unfounded, most major digital currency services now have a fairly clean track record and tight security measures.

To further mitigate the risk to users, Block Earner has partnered with Fireblocks, an institutional service used to safeguard and manage crypto-assets for over 800 industry-leading organisations.

Despite this, digital asset platforms are still at greater risk of theft than banks.

The bottom line

Investing your money via digital currencies can be an intimidating prospect, especially if this is your first exposure to the industry. You might be scared away by the risks, considering that the industry is still new.

It can be easy to think that you're better off just keeping your money in cash. However, it's worth remembering that holding cash has its own risks.

By choosing not to invest your cash, you are still making an investment decision. That decision is to hold on to an asset exposed to inflation, central bank policy, economic downturns and long-term depreciation.

Remember that the inflation rate is currently around 5.1%, which is eating into the spending power of any savings. So with "high interest" accounts at an average rate of 1.16%, your wealth is declining daily.

Obviously, there is an alternative, but it's up to you to weigh up the risks.

Crypto savings accounts are an exciting new way for Australians to beat the banks at their own game and earn a competitive, passive income.

Disclosure: The author owns a range of cryptocurrencies at the time of writing.


Earn yield with Block Earner



Sponsored by Block Earner. The Australian Fintech helping users earn 7% fixed yield via its Block Earner Lend service & up to 18% variable annual yield via its DeFi Access service. App + website. T&Cs apply. Power up your money without the tech hurdles. Backers include Coinbase Ventures.

Browse our range of guides on how to earn a yield on different cryptos

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