Re: Worst of both worlds
The one 'end user' benefit of using a cryptocurrency that is highly regulated in this way is that the issuer / broker needs to keep sufficient capital at hand to cover their liabilities (ie the users' deposits). Doesn't seem as safe as a 'real' retail bank where most western countries have government-backed deposit insurance
Your "real" retail banks don't have sufficient capital at hand to cover their liabilities, it's called "fractional reserve banking", and your government deposit insurance schemes are mostly smoke and mirrors designed to try to prevent bank runs from happening in the first place - if a widespread loss of confidence in the banking sector were to occur, you would quickly find that those schemes don't have nearly enough money to handle it. I also recommend looking up the "bail-in" rules that have been put in place in most countries since the last financial crisis, and find out whose money will be used to rescue the banks next time around.
Also, this type of backing only really works for stablecoins with pegged-to-fiat value... if a customer buys $100 worth of crypto that becomes 'worth' $200 a month later and they want to cash out, where is the bank or broker going to get the money from
If the bank is acting as a bank, then you withdraw your funds in the same form you deposited them; if I deposit pounds in my bank, that's what I spend or withdraw, and it would be the same for bitcoin, stablecoins, or other cryptocurrencies. If I deposit one bitcoin, the bank custodies one bitcoin for me, and if I want to withdraw it, the bank gives me back my one bitcoin. What that bitcoin is worth in dollar terms is irrelevant to them.
If, on the other hand, the bank is acting as an exchange, then they are market-making, i.e. matching buyers and sellers. Thus they don't have to " get the money from" anywhere; your $100 worth of crypto is now worth $200 because someone else is willing to pay that for it, and the bank simply takes a fee, or adds a little margin on the bid-ask spread (or both), in facilitation the trade.
Those two functions are distinct and separate, and do indeed require different sets of regulations to protect customers, but in neither case should the bank itself be exposed to price volatility of any crypto on its books.