Crypto is the solution to bank runs, not the cause

In recent weeks, we saw Silicon Valley Bank close and be taken over by the FDIC, which guaranteed deposits and put it up for auction.

But the shutdown of especially Silvergate Bank and Signature bank, the top two banks that worked with crypto companies, gave the impression that the US government wants to push crypto out of the country.

You read Crypto for advisorsa weekly look at digital assets and the future of finance for financial advisors. Subscribe here to receive the mailing every Thursday.

For financiers, this may seem like a good time to turn away from crypto and avoid spending energy on it. However, this may actually be the best time to embrace it and learn more. Fallout in traditional banking is the situation Bitcoin was created for, and this is why crypto should continue to be adopted.

So many crypto and blockchain technology properties can provide solutions to the problems we see. Self-storage, transparency and instant settlement are inherent to crypto and can lead to more adoption.

Banks and financial institutions are custodians for most of our financial assets – including cash and securities. They hold the assets for us and make accounting notes regarding our “ownership”.

This scenario has arisen out of necessity because for decades it has been impractical for us to take care of our own assets. We have been dependent on custodians to facilitate the entire financial system, including trading, lending and borrowing.

The result: 1) extreme government regulation of custodians, and 2) blind trust in those custodians, largely because of that regulation.

Essentially, most Americans and Westerners are under the impression that their money is safe in chartered banks, as these banks cannot take too much risk with their money.

But what we’ve seen in recent weeks is that our money may not be safe in the bank, even with all that regulation. Crypto, on the other hand, is built on the idea of ​​self-storage.

I expect that more people and businesses will start looking at crypto self-storage as an option for some of their holdings – not necessarily because they are investors in crypto assets, but because they want to use the crypto skins as a way to bypass the addiction. on custodians regulated by the authorities.

The system is really only effective when we all control our own assets.

Many current cases and regulations involve transparency, or lack thereof. One of the purposes of registering with the government, the Fed and the SEC is to make the books public and visible to all of us so that we can feel comfortable making risk-based decisions. However, this transparency is usually quarterly, not up to the second.

The recent bank runs did not come from a concern for solvency, but from liquidity. Depositors start withdrawing deposits because no one wants to be the last one out and have no money.

If asset pools were transparent to the other, as we see in crypto, all depositors would know exactly how much liquidity the pools contained and could determine their relative need to withdraw efficiently, rather than just out of fear.

In an effort to increase value and provide services to depositors and other customers, banks and other custodians must either lend the money from deposit pools or invest in low-risk assets to try to earn some return.

Of course, there is a time difference between loans and securities. Although the securities are usually in very liquid markets, they do not settle immediately and are still subject to certain market timings.

We have recently seen bank runs where the panic extended into night and weekend hours, a difficult time for the bank to sell securities and free capital.

Contrast this with the crypto system, which is always on and where we see instant or near-instant settlement. When I send you bitcoin, ETH or USDC, these cryptoassets are moved from my wallet to yours immediately and the transaction is settled. You don’t have to wait for markets to open and money to transfer from my account to yours. Blockchain-based transactions are settled and final.

Over the past few years, with the rise and fall in the price of crypto assets and the increased media coverage and conversations about crypto, we have heard so many people saying that we don’t “need” crypto and that there is no way to justify its value. Even as an educator of financial professionals, I have said that we don’t really need crypto in the US or even in Western democracies.

Time and time again, however, we have seen a need for one or more of the qualities inherent in blockchain, crypto, and decentralized finance. We are beginning to observe realizations by individuals and businesses that a better financial system exists – one that they can use for financial transactions without government interference, policy making and money printing.

As the realization happens, and as crypto storage becomes more secure, we should see a natural migration towards crypto and blockchain. But this will require a need for assistance from financial professionals, including advisors, CPAs and attorneys. Current financial experts may see the recent events as a sign that the US government is anti-crypto, or they may see them as a sign that we need the crypto ecosystem.

Now may be the best time to start learning crypto and decide how best to incorporate it into a portfolio. The next bull run in crypto will not be based on speculation. It will be based on increased adoption and use by ordinary individuals and businesses who see crypto as a viable and necessary alternative to today’s financial system.