With the bug of cryptocurrency biting investors across all categories, financial institutions, particularly fintech start-ups, are rolling out newer ways to repackage digital currency products. Crypto fixed deposits (FDs) is one such product.
These are fixed deposits linked to a range of cryptocurrencies such as Bitcoin, Ethereum, Ripple, Tether, Polygon and Binance.
Deposit or lending?
As a matter of fact, they are a lending product. This is the way crypto FDs work: The investors who hold digital currencies can open a fixed deposit account. And these platforms take these coins and lend them to others for various purposes for anywhere between 7 to 90 days. After taking a small cut, these platforms transfer the remaining interest to users.
For instance, Zebpay offers the scheme of fixed crypto-deposit under ZebPay Lending.
“A lending deposit on ZebPay unlocks the power of passive returns from your crypto. Under a fixed-term deposit, you can lend us your crypto for up to 90-day periods,” states Zebpay on its official portal — zebpay.com.
What these digital platforms do is that they use the deposits of investors and lend them to others and lender gets an interest in return.
“Crypto fixed-term deposits allow users to lend their crypto assets for terms of seven, thirty, sixty and ninety days. It is a lending product that determines the rate of return based on the FD's tenure. A cryptocurrency owner may lend his or her holdings in exchange that provides such features to earn fixed interest - however, crypto being a highly volatile market will be subjected to market risks,” says Vikas Ahuja, CEO of CrossTower India.
Different from traditional FDs
Some of the fintech platforms offering crypto FDs don’t allow early redemption and place stringent limits on premature withdrawals. It is important to note that these “deposits” are not regulated by the banking regulator RBI.
“The crypto Fixed Term Deposit is very different from traditional fixed deposits in the banks. This is referred to as a fixed-term deposit since Virtual Digital Assets can be lent to investors, who will earn a ‘fixed return’ on these deposits. Interest rates will depend on the time period that the investor chooses. However, if the investor withdraws early (before the tenure ends) a small penalty will be applied,” adds Mr Ahuja.
While further elaborating on the nuances of crypto fixed deposits, he says that these FDs can be seen as an opportunity to invest the digital tokens to earn some interest, which is a function of market demand and supply.
“The fixed deposit model surely brings higher returns than a typical holding strategy on digital assets since the growth is guaranteed at a fixed rate. It gives an opportunity to earn interest on the crypto holding, rather than just keeping the cryptocurrency in a wallet. Investment yields are determined by the market demand and supply for the tokens and they may differ from token to token,” adds Mr Ahuja.
But since the sector is relatively new in India and regulations are still in the nascent stage, it is of utmost importance for investors to know about the process and risks of these products in entirety.