How Bitcoin and Other Magical Internet Money Loans Are Putting Your Financial Health at Risk

The collapse of Silicon Valley Bank (SVB) last week raises serious questions far more significant than the obvious ones cited by the financial press and a wide range of Washington politicians.

Among these are bank loans against doubtful assets. It doesn’t get much if any attention in the news or from Washington and is likely to be swept under the rug soon, allowing unnecessarily risky banking practices to continue.

Before the collapse last week, SVB provided loans against Bitcoin and other cryptocurrencies.

The question: why is any bank allowed to accept crypto as collateral for loans?

Bitcoin and its imitators are not money. They are not currency. They are hardly used to buying and selling, an unsurprising fact given that the Bitcoin system by design can only process seven transactions per second compared to many thousands of transactions per second for credit cards.

In fact, apart from laundering proceeds from drug trafficking, as well as hiding assets from creditors, estranged spouses and the tax police, cryptocurrencies have no use.

High-tech Ponzi scheme

Cryptocurrencies and their cousins, non-fungible tokens or NFTs – are just a high-tech Ponzi scheme. Instead of Charlie Ponzi or Bernie Madoff personally running the scam, the crypto scam relies on decentralized computer blockchains and “mining” of mathematical solutions.

Bitcoin’s supposed inventor, who went by the pseudonym Satoshi Nakamoto, has never been identified. He or she has since disappeared, leaving holders with a digital string worth only as much as the next idiot, or crook, will pay for this imaginary asset.

Early entrants in Ponzi schemes make big profits by cashing out while the gullible souls who are sucked in later are wiped out. That’s what happened to SVB, America’s 16^th largest bank, which was big on crypto loans.

Many Bitcoin “investors” have already been wiped out as the “market value” of Bitcoin fell from nearly $1.3 trillion in 2021 to around $389 billion on Friday, down nearly 70%.

Why do bank regulators allow our federally insured and regulated banks to make loans with magic internet money as collateral? It’s a crazy policy, no different than letting banks accept buckets of ice cubes in winter as collateral, even though they melt in the spring and evaporate in the summer

Silicon Valley Bank is just one of many federally insured financial institutions that accept cryptocurrency as collateral for loans. Some banks will lend you 90% of the apparent value of your crypto, although 50% loan-to-value is more common and seems to be the standard at SVB based on their website.

Zero interest crypto loan

All sorts of financial news outlets offer advice on loans against crypto. These include NerdWalletand the increasingly naive and untrustworthy Forbes. People with crypto can even borrow at zero interest. Gadzooks!

For a sobering look at the major risks of crypto lending, read Investopedia’s essay.

In the wake of the second largest bank failure in history, you should be deeply concerned that for more than four decades we have failed miserably to regulate banks. That history contrasts with the period from 1935 until voters abandoned the moderating and successful New Deal banking rules in favor of Reaganomics.

We took a wrong turn when the cautious New Deal banking regulations in effect from 1935 were killed by Reaganomics, which reregulated banks to reduce regulations and increase the risk of financial institutions failing. (There is no such thing as deregulationjust new regulation, which in our day and age terms usually means regulations that favor corporations, including banks, over customers, financial prudence, and public safety.)

The role of Congress

What we need now are congressional hearings to investigate the reasons why cryptocurrencies can be collateral for bank loans.

Contact the White House in writing via the hyperlink or call 202-456-1111 to request a ban on crypto as loan collateral. Call 202-456-1111.

Even if you don’t own Bitcoin or its growing list of alternatives, this story is important to you for several reasons.

Your money is only insured up to $250,000. Money over that is not insured. This means that if, for example, you are the trustee of a non-profit organization and it has $1 million in the bank, you or the organization you lead run the risk of being wiped out in a bank failure.

The federal government covers all deposits for SVB and at Signature Bank in New York, which failed on Sunday. But that doesn’t mean it always will. During a previous banking crisis, nonprofits with more than the $100,000 guarantee lost their deposits above that amount, which received very little news coverage at the time.

If people want to buy crypto, they should be free to do so. But they should not be allowed to put our bank deposits and investments at risk by using these digital tokens as collateral for loans. After all, it’s your and my bank deposits, along with those of businesses, nonprofits, and our government that banks use to make loans, so it’s not like we don’t have a deep interest in blocking crypto of any kind as collateral for loan.