Dive Brief:

• The cryptocurrency exchange Gemini on Tuesday launched a savings product, dubbed Earn, that lets customers move their holdings in Bitcoin, or any of the 26 cryptocurrencies Gemini supports, into accounts yielding interest as high as 7.4%.
• Gemini said it can afford to pay relatively high rates — by comparison, the average savings account in the U.S. yields 0.05% interest, according to Federal Deposit Insurance Corp. (FDIC) data — because it lends the cryptocurrency deposits to institutional borrowers through a partner, Genesis Global Capital, at a higher interest rate.
• Customers should plan to assume considerably more risk than with a traditional bank's savings account. Deposits aren't protected by the FDIC, and there's no central bank, such as the Federal Reserve, to set benchmark interest rates. Rather, Gemini and other providers adjust rates based on their own supply-and-demand analysis.

Dive Insight:

Earn marks a continuing expansion of Gemini's products in banking-adjacent spaces. Gemini bought fintech startup Blockrize last month to help build its own credit card offering rewards of up to 3% in cryptocurrencies. JPMorgan Chase extended banking services to the crypto exchange last spring.

Gemini touts Earn as the first account of its kind available in all 50 states. Crypto lender BlockFi offers an account with up to 8.6% annual percentage yield (APY) on deposits, but it is not available in New York. Gemini, by contrast, is regulated by New York's Department of Financial Services. Earn will not, however, be available to clients outside the U.S.

The Earn offering opened to existing Gemini customers Tuesday. Gemini said it expects later this month to allow clients of competing exchanges to transfer their assets into Earn accounts. Account holders can withdraw their crypto assets at any time without penalties or fees.

Hans Morris, a managing partner at the venture capital firm NYCA Partners, characterized the Earn offering as part of the "creeping normalization of crypto."

"It will be something to watch if noncrypto holders are brought in by the offering of interest accounts," he told American Banker.

Noah Perlman, Gemini's chief operating officer, said the product should be seen as more of an investment than a savings account. "It lets investors put their passive crypto assets to work and earn a return at competitive rates," he told Bloomberg.

However, Perlman told American Banker, "You're always going to have maximalists, in any space ... and I wouldn't be surprised given the delta between the interest offered on a traditional banking account that you might have consumers who decide to take their entire savings and checking balance and move it to Gemini, to earn the compelling interest."

It's also likely, Perlman said, that a crypto account like Earn would become one silo in a user's portfolio, alongside fixed income, equity and cash.

The annual percentage yield Earn offers varies by currency from 1.54% for Balancer to 7.4% for Filecoin. Bitcoin and Ether, the most popular currencies, each yield 3.05%.

But the past year has shown the value of Bitcoin, for example, can swing wildly. Its worth has roughly quadrupled since early February 2020 — to well over $36,000 now — but dipped to $4,107 at the start of the coronavirus pandemic, according to Yahoo Finance.

Caitlin Long, CEO of Avanti Bank, said the Earn program can offer a high APY because of the volatility of crypto's value — and because only 20% to 25% is outside of self-custody and available for lending.

That lack of availability might prompt institutions to pay Gemini a higher rate for borrowing — Perlman calls that "part of a maturation of the [crypto] space" — but some of that risk passes to the consumer.

Gemini warns in its account terms and conditions that customers' digital assets will leave the exchange's custody, "and you accept the risk of loss associated with loan transactions, up to and including total loss of your available digital assets."

"Consumers need to appreciate that this is nothing like putting your cash in a savings account," Sarah Coles, a personal finance analyst at the British investment firm Hargreaves Lansdown, told Bloomberg. "There's a real danger if people assume they can make a big return without risking capital."

For one, it's difficult to track the solvency of the intermediaries attached to Gemini's Earn, Long told American Banker.

"There's no financial disclosure [in the Bitcoin lending market] and almost no regulatory examination of intermediaries — and most of them are not audited either," she said. "So, it's not possible to do counterparty credit risk analysis in this market."

Perlman told CNBC each customer has to assess their own risk tolerance, but reinforced that Gemini's security protocols are "on par with those offered by top financial institutions."

"We still think that crypto empowers individuals in a way that traditional banks don't," he told the network. "But, at the same time, there is a reason why Wall Street and traditional banking has been around as long as it has ... It provides lots of safeguards, and we think that we can get the best of both worlds and offer that to our customers."