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

Beginner’s Guide / 28.12.2020

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

There was a time before these convenient platforms existed. To get Bitcoin in its early days, you needed 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 both efficient and convenient. Think about it. How many cryptocurrencies would you have at this moment 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 by far the fastest way to join the blockchain revolution. Back in the day, these exchanges could operate in a free manner with little to no government oversight. However, things have begun to change ever since Bitcoin nearly hit the $20,000 mark in December 2017. It was at this time that officials started to take an interest in digital assets. 

Regulatory Compliance

These regulators believed that it was necessary to regulate crypto exchanges to mitigate the risks of money laundering. To this day, governments often reference money laundering schemes when speaking of people converting their fiat into cryptocurrency. Regardless of their stance at the time, the vast majority of 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 in very short succession. This integration was a bid to appease regulators. In some instances, these protocols were introduced in a manner that left investors who were unwilling to comply with the new laws no other 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 directly following the 9/11 terrorist attacks in New York. Today, nearly every centralized financial institution is required to 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, and it would be perfectly normal. This volatility is ideal for day traders that make their earning of the daily swings of the market. 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, there are stable coins that also serve this purpose. 

Notably, converting your cryptocurrency over 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 is better suited to your goals than another. Here are the two main types of fiat-to-crypto exchanges investors encounter in the market 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. Today there is an impressive selection of centralized fiat-to-crypto exchanges to work with. Here are a couple of well-known examples:

DEX Decentralized Exchanges

Recently, a new type of fiat-to-crypto exchange has 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 does take a little more time and effort on your part. Exchanges like Bisq allow you to load your account using payment processors such as Zelle and then 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 still dominates. 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.

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

David Hamilton aka DavidtheWriter is a long time Bitcoinist and cryptocurrency journalist. Currently, he has over a thousand articles published on blockchain technology. His expertise and experience makes him one of the most reputable writers in the sector.