What are Fiat-to-Crypto Exchanges and Why are They Important

Fiat-to-crypto exchanges are a critical component of the industry. These platforms allow users to purchase crypto using traditional financial methods such as debit cards, credit cards, or bank accounts. Consequently, fiat-to-crypto exchanges are crucial in introducing new capital into the market. 

There was a time before these convenient platforms existed. For example, to get Bitcoin in its early days, you need to mine for it or trade some service for crypto payments. While this strategy worked fine during the market’s infantile stages, it is hardly ideal for the large-scale adoption of cryptocurrencies.

The Need for Crypto On-Ramps

It wasn’t long before developers began to see a severe need for fiat on-ramps into the market. New users will not get involved with cryptocurrencies unless the technology is efficient and convenient. Think about it. How many cryptocurrencies would you have now if you had to mine your coins or sell services? It’s safe to guess, probably not much.

Since fiat-to-crypto exchanges simplify entry into the market, they are the fastest way to join the blockchain revolution. Back then, these exchanges could operate freely without government oversight. However, things have begun to change ever since Bitcoin nearly hit the $20,000 mark in December 2017. At this time, officials started to take an interest in digital assets. 

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Regulatory Compliance

These regulators believed it necessary to regulate crypto exchanges to mitigate money laundering risks. To this day, governments often reference money laundering schemes when speaking of people converting their fiat into cryptocurrency. However, regardless of their stance at the time, most cryptocurrency users are law-abiding citizens seeking more control over their financial future. 

All major centralized exchanges offering fiat-to-crypto services began to integrate KYC (know your customer) and AML (anti-money laundering) protocols quickly. This integration was a bid to appease regulators. Unfortunately, in some instances, these protocols were introduced that left investors unwilling to comply with the new laws and had no choice but to abandon their cryptocurrencies forever. 

What is KYC?

KYC is a protocol designed to prevent laundered funds from being used to fund terrorist organizations. For instance, KYC regulations were slid into the USA PATRIOT Act following the 9/11 terrorist attacks in New York. Today, nearly every centralized financial institution must provide some form of KYC compliance.

Why Fiat Currency is Important to Crypto

There are many reasons for introducing new users to the market, that fiat integration into the industry is vital to growth. For one, fiat currency helps investors gauge the demand for specific coins in the market. In this way, fiat allows investors to measure the impact of individual projects and developments in the market.

Safe Haven

Fiat currency serves another crucial role in the market as a haven. Cryptocurrencies are notoriously volatile. These coins can gain or lose 10% of their value on any given day, which would be perfectly normal. This volatility is ideal for day traders who profit from the market’s daily swings. Sadly, it’s not great for the average user who may be holding cryptocurrencies for various reasons.

All investors benefit significantly from the ability to exit this volatility with ease. Fiat-to-crypto exchanges were, at first, the only way to accomplish this task. Traders could swap their crypto for fiat and wait out all the volatility until they felt confident enough to return to their position. Nowadays, some stablecoins also serve this purpose. 

Converting your cryptocurrency to stablecoins is usually faster and less expensive than trading your crypto for fiat. These cost savings can be attributed to removing all third parties, such as banks, during the transaction. 

Types of Fiat-to-Crypto Exchanges

There are a variety of fiat-to-crypto exchanges available today. Depending on your overall investment strategy, you may find that one exchange style better suits your goals than another. Here are the two main types of fiat-to-crypto exchanges investors encounter today. 

Centralized Exchanges

The most popular type of fiat-to-crypto exchange is a centralized exchange. Importantly, centralized exchanges are what are known as custodial exchanges. This designation refers to the fact that they hold all users’ funds on their network. Often these platforms will keep these funds in large community wallets. Notably, centralized exchanges are easy to navigate and offer an excellent selection of fiat-to-crypto options. 

Bank transfers and debit card purchases are the most common way to interact with these fiat-on ramps. Some platforms even allow you to purchase your crypto using a credit card. This feature is excellent for skilled investors seeking to leverage their trades. In addition, today, there is an impressive selection of centralized fiat-to-crypto exchanges to work with. Here are a couple of well-known examples:

• Binance
• Coinbase
• Gemini
• Kraken

DEX Decentralized Exchanges

A new fiat-to-crypto exchange has recently started to spring up across the market. Unlike their centralized counterparts, DEX exchanges are non-custodial. This designation means that DEXs don’t require you to upload your cryptocurrency to a network wallet. Instead, these exchanges facilitate your trade directly in a peer-to-peer manner. 

Additionally, DEXs don’t need to adhere to KYC standards because they never hold anyone’s funds on their network. You can buy cryptocurrency directly from other users using fiat currencies on these platforms, but it takes a little more time and effort. Exchanges like Bisq allow you to load your account using payment processors such as Zelle and complete your trades directly. 

Fiat-to-Crypto Exchanges – The Veins of the Blockchain Body

There will always be a need for reliable fiat-to-crypto exchanges as long as the traditional financial sector dominates. But thankfully, these platforms have come a long way. Nowadays, anyone can find one of these platforms and convert their fiat over to their favorite crypto within minutes.

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It will be interesting to see how the introduction of DEXs into this race alters the market in the coming months. For now, any of the platforms listed can help you convert that outdated fiat into some sleek and technologically advanced cryptocurrency. Don’t forget to check out our top 5 fiat-to-crypto exchanges for 2021.