How Can a Bitcoin Bank Pay Interest?
While several global headlines have declared that millennials are increasingly disinterested in banks, the owners of BTC.sx exchange have launched Magnr, “the first savings account for Bitcoin.”
While several global headlines have declared that millennials are increasingly disinterested in banks, the owners of BTC.sx exchange have launched Magnr, “the first savings account for Bitcoin.” They promise a 2.18 % return over the first six months of a deposit, and claim that all depositors will be able to audit their individual holdings on the Bitcoin blockchain.
“One key difference from traditional processes is that we maintain all transactions on the blockchain such that all our clients have full transparency over their wallets. This provides auditability and accountability that no traditional institution has offered before.”
Wondering just how bank-like Magnr intended to be, Cointelegraph interviewed Josh Blatchford, CMO of Magnr.
Cointelegraph: Do you lend out the money that clients put on deposit with you — i.e., do you practice fractional reserve lending?
Josh Blatchford: Currently, no deposits are being lent out. Our trading platform, BTC.sx, operates with its own internal funds and the launch of Magnr does not change this. However, in the near future, a small proportion of client funds will be used for leveraged trades on our trading platform.
We have carefully modeled these risks and calculated a return that we can guarantee to our clients, ensuring a sustainable business model.
CT: How are depositors able to earn a 2.18% return if Magnr does not loan out their deposits at interest? Are you just banking on a price increase of Bitcoin?
JB: We operate under a money management business structure. By depositing funds with Magnr, you are entrusting us to safely manage your bitcoin. Our business model has been structured so that for every one bitcoin deposited, one bitcoin will be available for withdrawal.
We have reviewed our risks and our business model and calculated a guaranteed return of 2.18%. Following this six-month promotional rate, we will review this model again and determine what interest rate will be applicable. This process will be iterated every cycle, thus ensuring the appropriate level of returns to our clients.
Our revenue is denominated in bitcoin. Therefore we do not have an exchange rate risk between BTC.sx and Magnr. We receive bitcoin income and then pay out bitcoin interest. Therefore we are not banking on the price increasing.
CT: How are you different from a bank?
JB: Traditional financial institutions operate by utilising assets that they manage either by lending, or investing in other asset classes that generate higher returns from which they can pass on to their clients. We operate a similar model, however in the cryptocurrency space. This is currently not possible in traditional markets.
One key difference from traditional processes is that we maintain all transactions on the blockchain such that all our clients have full transparency over their wallets. This provides auditability and accountability that no traditional institution has offered before.
The first use of the funds is in our existing and well-established trading platform (BTC.sx), where traders use leverage to invest. Currently, we have ample assets to cover any leverage. As the market grows, we may lean upon these other assets to provide additional leverage. However, these assets will always be maintained in a highly liquid state to ensure we can honor our client requirements.
CT: If a user wants to withdraw her funds, does she get back the BTC amount she deposited plus interest, or the dollar amount she deposited plus interest?
JB: We are a bitcoin-only company. If a user withdraws their funds, they receive the BTC amount they deposited plus interest.
CT: What kind of security do you use to ensure that your depositors' private keys are not hacked?
JB: The safety of client funds is our top priority. We use cold storage, transaction audits and BitGo multisig technology to keep deposits secure. We securely manage private keys offline, on behalf of our users.
CT: Will you offer any other traditional banking products, like direct-spend platforms? Or are consumers' funds locked for the time of deposit?
JB: We are considering the possibility of providing further traditional banking products. Customer funds are not locked away, but withdrawals are processed manually once a day for security purposes. Magnr savings accounts should not be considered as a wallet. We are considering providing two account tiers, one of which would lock away deposits in return for a higher interest rate.