After the recent failure of three banks – Silicon Valley Bank, Silvergate Bank and Signature Bank – many pointed fingers at crypto as the cause. But crypto may actually be the solution, not the problem, as DJ Windle writes today.
Also in today’s newsletter, given that stablecoin depegging has also been in the news lately, Robert Stevens explains why people are calling for crypto companies and those behind stablecoins to prove they have enough funds to pay their customers.
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Stop Blaming Crypto for Traditional Finance Failures
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Recent news has been dominated by the collapse of several banks, including Silicon Valley Bank, Silvergate and Signature Bank – all of which provided vital services to the crypto industry by bridging the gap between blockchain technology and traditional finance.
However, some media outlets are quick to blame the crypto industry for these financial disasters. Is this fair, or are traditional financial institutions failing us again? Many crypto advocates argue that blockchain technology offers a solution to the issues plaguing traditional finance and it isn’t the problem.
Bank failures can expose the vulnerabilities of traditional centralized financial systems, prompting individuals and businesses to explore alternative solutions. The shortcomings of these systems, such as single points of failure, inefficiencies and the potential for mismanagement, can encourage more people to turn to decentralized financial systems like blockchain and cryptocurrencies, which offer increased security, transparency and autonomy.
As traditional financial institutions falter, blockchain technology and cryptocurrencies can emerge as more reliable and secure alternatives, building trust among users. The transparency, immutability and consensus mechanisms in blockchain technology can foster a higher level of confidence in the data and transactions recorded on the network. In times of financial instability, individuals and businesses may also view cryptocurrencies, particularly those with limited supply and strong fundamentals, as a hedge against traditional financial risks, driving up demand and potentially accelerating adoption.
Bank failures can also serve as a catalyst for innovation, creating demand for better financial solutions. Entrepreneurs and developers may seize this opportunity to create new blockchain-based financial products and services that address the shortcomings of traditional banking systems. This can include innovations in cross-border payments, lending and asset management.
Moreover, bank failures may disrupt cross-border transactions, making it more challenging for businesses to make payments or transfer funds internationally. Blockchain and cryptocurrencies can offer faster, cheaper and more secure cross-border transactions, making them an attractive alternative for businesses dealing with international partners.
Finally, the collapse of traditional financial institutions may prompt regulators to scrutinize financial systems more closely, potentially leading to clearer regulations and guidelines for blockchain and cryptocurrencies. Regulatory clarity can encourage more businesses and individuals to adopt these technologies, as they can better understand the risks and benefits involved.
Regular banks do not actually hold all of your money. They lend out most of your deposits in an attempt to eke out returns from financial markets. This works, for the most part, because the bank insures deposits with the federal government and because the bank widely diversifies its exposure to risk to ensure that it won’t be caught short in the event of a financial crash.
This system occasionally fails in traditional finance (see: Lehman) but fails frequently in crypto. The government does not insure deposits to crypto platforms and the platforms often do not manage risk particularly well (see: FTX, Voyager Digital, Celsius Network), making high-risk bets that end in catastrophe.
After so many platforms squandered customer funds, crypto traders are thinking twice about depositing funds to crypto exchanges and lending institutions that “rehypothecate” uninsured deposits – which means they repurpose customer money and lend the funds out in the markets. A safer bet looks like trading on platforms that “fully back” their reserves. But what does this really mean, and should such claims be taken with a pinch of salt?
When a financial product, such as a stablecoin or depositary institution, claims to “fully back” its reserves, it means that it has stored enough money behind a product, like a stablecoin or a customer’s trading account, to support its worth. So, a crypto exchange that “fully backs” its reserves should always be able to pay out customer withdrawals, no matter the state of the market.
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Circle’s USDC, the second-largest stablecoin, with $43 billion market capitalization, held an undisclosed part of its $9.8 billion cash reserves at failed Silicon Valley Bank.
Amid a U.S. banking crisis, value is flowing into bitcoin. Is this the beginning of the “Great Reset?” investor and author Tatiana Koffman asks.
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.
