Traditional banks rely on ‘small buffer’: Paris Blockchain Week 2023

The first day of Paris Blockchain Week (PBW) brings more thoughts about the ongoing crisis in the global banking system, with industry leaders comparing the collapses of major cryptocurrency firms like FTX to the fall of banks like Silicon Valley Bank (SVB).

On March 22, PBW hosted a panel discussion titled “FTX, Luna, Celsius, 3AC: From Hero to Zero,” which brought together industry leaders from blockchain venture firm Node Capital, crypto-friendly SIX Digital Exchange, Delta Growth Fund, and crypto-liquidity provider Worton. The panel took place on PBW’s Mona Lisa stage.

According to Woorton co-founder and head of trading Zahreddine Touag, the FTX- and Celsius-related meltdown in the crypto industry has been triggered by reasons other than those that led to the ongoing banking crisis.

“There is a lack of due diligence from the investors, a lack of risk management from the players,” Touag said, referring to collapses like FTX. Noting that investors often don’t realize the risks of holding their crypto assets, he mistakenly believes that regulated platforms are protected from losses, saying:

“If you’re going to be regulated in France, you just have to do KYC and AML. When you do KYC, AML, it doesn’t protect you from losing the money. It doesn’t at all. And in a lot of countries, a lot of people think that to be regulated be protected.”

There are also many other reasons such as greed, especially seen among young and inexperienced investors, Touag said. According to the manager, the FTX and Celsius contagion is still not over, and industry players are still looking at each other and thinking about who is affected or not. “Many are affected and we don’t know. So in the next few months there will be more news,” he said.

Unlike crypto collapses, the ongoing global banking problems were mainly driven by the fragility of the entire model of traditional banks, according to Touag.

“Some people are aware but not everyone is aware that this fractional reserve system with the banks makes it very fragile,” the Woorton boss stated, adding that the banks only have about 12% of their funds liquid. He said:

“The trillions they say they have on their books, they don’t. There are other places. It’s invested, it’s in the market, but they don’t have it. So they rely on this little buffer, 12%.”

Touag added that troubled banks such as SVB often rely on jurisdictions in Europe and the US, while relying on this “small buffer” and expecting that “nobody will show up in the shop and ask for money”. According to Touag, it’s the same story with bigger banks like Morgan Stanley or JPMorgan, but people continue to think they’re “too big to fail.”

Related: FDIC sells Signature Bank deposits to Flagstar, crypto not included

“That’s what happened with SVB,” Touag said, adding that Silvergate’s problem was “a little different.” He also claimed that Signature’s crisis is “a different story, because the bank is not closed.” Touag emphasized that Signature was just acquired and his company was using Signature this morning. He added:

“In the crypto banking system, Signature is the best place to bank. Why? Because the regulator said they want to make every single depositor whole. So we know our money is safe there, even if they go bankrupt, our money is saved.”

As previously reported, the New York State Department of Financial Services took over Signature on March 12, naming the FDIC as receiver. According to Barney Frank, a former member of the US House of Representatives, regulators took action against Signature despite no insolvency.