We recently saw the closure of Silicon Valley Bank , which was taken over by the FDIC. We've also seen other banks run and fail, including Silvergate Bank and Signature Bank. This led to a growing wave of fears of runs on other banks such as First Republic Bank. And we saw the banking contagion move from America to Europe. Specifically to Credit Suisse, which is the Swiss central bank recently granted a loan of 50 billion CHF. But maybe not only. We are keeping an eye on Deutsche Bank and Société Générale, whose credit default swaps are showing a warning signal.
The closure of Silvergate Bank and Signature bank, two of the largest banks that worked with cryptocurrency companies, gave the impression that the US government would like to force cryptocurrencies out of the country. The deepening problems in traditional banking are precisely the situation for which Bitcoin was created. Self-custody, transparency and instant settlement are among the key features of cryptocurrencies and could lead to greater adoption. Let's look at these properties in a little more detail.
Self-custody
Banks and financial institutions are custodians of most of our financial assets, including cash and securities. They hold these assets for us and make accounting entries regarding our "ownership". This scenario arose out of necessity because for decades it has been impractical for us to take custody of our own assets. We depended on administrators to facilitate the entire financial system, including trading, lending and credit. The result: extreme government regulation of escrow providers and blind trust in these providers, largely because of that regulation. However, in the last few weeks we have seen that our money in the bank may not be safe even with all the regulation. Cryptography, on the other hand, is built on the idea of self-storage. I believe that more and more people and businesses will begin to see crypto-self-government as an option for some of their assets, as they will want to bypass dependence on government-regulated administrators. The system is only truly effective when everyone has control over their assets.
Transparency
Many of the current issues and regulations are about transparency, or rather the lack of it. One of the purposes of registration with state authorities, the Fed and the SEC is the obligation to publish and make visible the accounting results. Although this transparency is commendable, it is delayed (usually quarterly). The recent runs on banks were not caused by solvency concerns, but liquidity concerns. Depositors have started withdrawing deposits as no one wants to be the last one left with nothing but teary eyes and no cash. If asset pools were transparent as we see with cryptocurrencies, all depositors would know exactly how much liquidity the pools contain and could determine their relative withdrawal needs in an efficient manner.
Instant settlement
In an effort to increase their value and provide services to depositors and other customers, banks and other custodians must either borrow money from deposit pools or invest in low-risk assets and try to earn some return. Of course, there is a time mismatch between loans and securities. While the securities are usually in very liquid markets, they are not settled immediately and are still subject to certain market hours. We have seen bank runs where the panic spilled over into the night and weekend hours, a difficult time for the bank to sell some securities to free up capital. And then we have a cryptocurrency system that is always up and running where we see instant or near-instant settlement. There is no need to wait for markets to open and money to be transferred. Blockchain based transactions are settled and final.
Time and time again, it has been shown that we need one or more of the properties inherent in blockchains, crypto, and decentralized finance. People and businesses are beginning to realize that there is a better financial system (one that they can use for financial transactions without government intervention), policy making and money printing. Potentially, the next cryptocurrency bull run will not be based on speculation. It will be based on greater acceptance and use by ordinary individuals and businesses who see crypto as a viable and necessary alternative to the current financial system.
