Some government officials are pointing fingers at crypto as the cause for the recent spree of bank failures. But self-custody, transparency and immediate settlement are just a few ways that crypto could prevent those runs and losses of funds, as Adam Blumberg writes today.
Also in today’s newsletter, Krisztian Sandor explains how crypto custody works and helps people keep their digital assets safe.
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Crypto Is the Solution to Bank Runs, Not the Cause
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The recent closure of Silvergate Bank and Signature bank, the top two banks that worked with crypto companies, gave many the impression that the U.S. government wants to push crypto out of the country.
For financial professionals, this may seem like a good time to turn away from crypto and avoid devoting energy to it. However, this could actually be the best time to embrace it and learn more.
So many crypto and blockchain technology characteristics could provide solutions to the issues we’re seeing.
Self-custody
What we’ve seen in the last few weeks is that our money might not be safe at the bank, even with all that regulation. Crypto, on the other hand, is built on the idea of self-custody.
I anticipate that more people and businesses will start viewing crypto self-custody as an option for some of their assets – not necessarily because they’re investors in crypto assets, but because they want to use the crypto rails as a way to circumvent the reliance on custodians regulated by the government.
Transparency
Many current issues and regulations involve transparency, or lack thereof. One of the purposes of registering with the state, Fed and SEC is to make the books public and visible to us all, so we can feel comfortable making risk-based decisions. However, that transparency is usually quarterly, not up to the second.
If the asset pools were transparent up to the second, as we see in crypto, all depositors would know exactly how much liquidity the pools contained and could determine their relative need to withdraw in an efficient manner, rather than just out of fear.
Immediate settlement
In an attempt to grow their value and provide services to depositors and other customers, banks and other custodians need to either lend the money from deposit pools or invest in low-risk assets to try to earn some yield. Of course, there is a time mismatch betweens loans and securities.
Contrast this to the crypto system, which is always on and where we see instant or near-instant settlement. When I send you bitcoin, ETH or USDC, those crypto assets move from my wallet to yours right away, and the transaction is settled.
In traditional banking, all custodians are financial institutions, as required by law. With crypto, however, holders have the opportunity to become their own custodians. Crypto custody means securing the private key that proves you own of the funds held within your crypto wallet.
With that in mind, there are two main types of crypto custody for you to know.
Self-custody
As discussed, self-custody is when you personally hold the private key for your own wallet. This means you are the only one who can prove ownership of your funds and access your holdings. With great power, however, comes great responsibility. Being your own custodian means having complete control over your wallet, but it also means you bear all the risks too. If you lose access to your physical device (cold wallet) or forget the private key, your crypto will most likely be gone forever.
Third-party custody
Those who do not want to take the responsibility of managing their own accounts or find it too intimidating to deal with the tech might want to turn to a third-party custodian. These are registered, regulated financial institutions that have acquired a state-level or national license to act as a custodian. This type of crypto custodian holds clients’ private keys to their wallets in a safe manner and ensures the security of their holdings.
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The narratives around bank failures, stablecoins and interest rate hikes seem strong enough to propel the price of bitcoin, says CoinDesk’s George Kaloudis.
The U.S. government is in the business of bailing out banks. But some people prefer to keep cash under the mattress.
Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.
