The institution of personal banking is incredibly powerful.
You don’t even need to read a research report or some harrowing personal account to prove it. Instead, just pretend for a moment that all your bank accounts have been frozen. Your credit cards don’t work either.
How do you proceed?
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Well, hopefully you have a stash of cash under your mattress. or you have bitcoin and you live near enough places that actually participate in bitcoin bitcoin circular economy, Maybe you live in Argentina and you can use a crypto dollar stablecoin like Tether because your sovereign currency is let you down from the 1980s,
Otherwise, you’re in a tough spot.
The low hanging fruit here is a clarion call to action: we need more of these circular crypto economies. community, county, state, entire country – an example El Salvador’s Bitcoin Beach – Which work completely different from the old banking system.
But while these circular economies are being created, banking and crypto are still closely tied. A look at the news from last week dominated by Silvergate Bank, which ran into a brick wall of trouble, barred by its stock (SI) losing more than 50% of its value on Thursday,
Before Silvergate and After Silvergate
Silvergate is the bank for many crypto businesses that have problems maintaining banking relationships.
Silvergate opening its doors to crypto is seen as a turning point for crypto businesses, especially crypto exchanges. My colleague Daniel Kuhn shed as much light in a piece published last week titled “Before Silvergate and After Silvergate“Borrowing a quote from the now-infamous FTX founder Sam Bankman-Fried on how life was better for crypto companies with Silvergate in the fold.
If we look at crypto exchanges, Silvergate is very popular because a) it provides access to banking in the first place and b) Silvergate runs the Silvergate Exchange Network (SEN). The SEN, which was recently deactivated, allowed instant settlement between Silvergate Bank customers at any time, including nights and weekends, 24/7. It works like how Venmo or CashApp settles debts between friends over late night ramen or pizza or whatever. Access to SEN attracted a number of crypto exchange customers including Binance.US, Kraken and Gemini.
And then the FTX collapse happened, which rattled Silvergate customers and led to billions of dollars In deposit withdrawal. silvergate later Federal Home Loan Bank system to boost operations,
Things were clearly tough for Silvergate (and other crypto banks, of course), and it got even tougher when US Senator Elizabeth Warren (D-Mass.) arrived. sent a lewd letter to silvergate while the White House was publish blog post Regarding its crypto concerns. even more exits from Silvergate and Appreciated SEN last week,
To be clear, the regulators and politicians did not actually say that crypto exchanges and companies should not do banking, but they injected uncertainty into the industry. And the funny thing about Silvergate is that it had no problems because it was making loans using bitcoin and crypto as collateral. It ran into issues due to the bank run. A bank run encouraged by the US government.
This is where a good argument about the potential side effects of Choke Point 2.0 comes into play, to use a CoinDesk columnist and venture capitalist. Nick Carter’s quote, I’m not going to dive into the intimate details of Choke Point 2.0 (basically the idea that the government can threaten regulation against banks if they service certain companies or certain industries), but I’m going to tackle the banking problem in Engenders. I want
Crypto’s Banking Problem Isn’t Ironic
The Silvergate issues have now made it somewhat clear that crypto does indeed have a banking problem. And most crypto commentators look at this and say: crypto was created to skirt the banking system, it’s really funny that crypto needs banks to skirt the banking system.
funny? well maybe. But I can’t laugh.
First of all, banks and crypto can co-exist (yes, Even in a hyperbitcoinized world) and I think they will and should. Just because the option of using a bank with bitcoin or any other crypto exists, doesn’t mean everyone will shun banks altogether. In fact, honest banking can be a net positive.
Of course, there will be (and are) a fanatical subset of self-sovereign individuals who completely buck third parties, but there are billions of people in this world. Organization of those is far easier, with few dependencies on third parties. The world that bitcoin and crypto can encourage is a world where those third parties are more honest. More honest banks are in the business of keeping your money safe and giving responsible lenders access to future capital (i.e., credit) better than less honest banks.
Hand-wavy, I know. but possibly true.
Finally, crypto companies requiring banks to “skit the banking system” highlights why the banking system needs to be skirted (or at least broken somehow). Imagine for a moment that there is an entity in a country that is so critically important to serving a customer in an undesirable industry that the simple threat of regulation against that entity brings that undesirable industry to its knees. But there is no need for imagination: this is what is happening in the United States. Now we see an implicit promise of future regulation from the executive and legislative branch of the US government if banks serving crypto companies don’t shape up. whatever that means.
While I don’t think this is a good thing, it can be if not overdone. If there is a higher bar for banking access for crypto companies which leads to more intensive due diligence which somehow results in fewer bad companies in the ecosystem, then ultimately retail will be safer and the system less vulnerable to future crypto shocks. Will be sensitive
Maybe this is what happens. For now, I choose cautious optimism.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.