In its early days, crypto enthusiasm was fuelled by the promise to cut the rigged banking system out of the people’s basic need to exchange goods and
In its early days, crypto enthusiasm was fuelled by the promise to cut the rigged banking system out of the people’s basic need to exchange goods and funds. To some degree, it still is. But as digital assets become more and more intertwined with a larger financial market, this tension gradually fades away.
The recent wave of partial bailouts of failed institutions such as Silvergate Bank, Signature Bank and Silicon Valley Bank (SVB) has not raised any concerns among the crypto community. Moreover, the United States Federal Reserve System came as a savior, at least in regard to USD Coin (USDC) issuer Circle, which kept a significant portion of its reserves in Signature Bank and SVB.
If the Fed decided to let the banks fail, we would probably have witnessed another sharp dip in the crypto market and not the optimistic resurgence of the last two weeks.
Does this mean that the crypto industry has come to a point where it is highly dependent on traditional banking and cannot contrapose itself as an alternative anymore? Is that kind of interconnectedness desirable for digital assets or should the industry create some distance from traditional finance (TradFi)?
Was it a bailout?
Technically, both SVB and Signature were bailed out, but economists are highlighting the major difference between the current solution and the U.S. government’s actions during the economic crisis in 2008.
“During the [2008] financial crisis, there were investors and owners of systemic large banks that were bailed out,” as Treasury Secretary Janet Yellen explained, but this time, it was depositors who got their back covered by the Deposit Insurance Fund, supplied by the banks, not taxpayers.
The Federal Deposit Insurance Corporation (FDIC) has effectively guaranteed all deposits at both banks beyond its normal limit of $250,000 per account. Still, it was only due to the FDIC’s support that Circle was able to withdraw the whole $3.3 billion deposit from the SVB and save USDC from further depegging.
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Still, isn’t there something odd about an industry with a strong anti-establishment and even anti-Fed background taking federal backing for granted, if not outright advocating for it?
Maybe not, as no speaker Cointelegraph has reached out to sees any ethical contradictions here. There’s an overlap between the crypto community and the startup community, so there’s naturally been a lot of support for the bank bailouts, Daniel Chong, CEO and co-founder at Harpie, explained:
“I personally don’t see a dissonance here: You can be a TradFi skeptic and still be in favor of startups having a way to continue operations and make payroll. We don’t need thousands of employees missing paychecks to prove that DeFi is a viable financial system.”
Although the DNA of the crypto community would oppose a bailout, Tony Petrov, chief legal officer at risk management platform Sumsub, told Cointelegraph that, sometimes, it is very important to at least attempt to save valuable institutions on the border of crypto and fiat — especially given the obvious scarcity of such institutions.
Of course, bailouts have gained a negative connotation not only within the crypto community. In some cases, a bailout looks like billionaire executives getting taxpayer-funded handouts in exchange for their own poor decisions. The philosophy of “too big to fail” is helping utterly ineffective and ill-governed banks to stay where they are, even if they don’t provide real value to the society where they exist. But, Petrov continued, it’s hard to deny that what happened to SVB, Silvergate and Signature was not a clear example of mismanagement solely on the side of the banks’ executives:
“After all, they invested in governmental notes, not in some shady digital coins, the value of which can hardly be predictable even within one day. Taking this topic very softly, it can be claimed that a part of the blame for the consequences should be borne by the U.S. government.”
Is crypto really to blame?
Although the panic among crypto investors following the FTX debacle played a role in depleting the bank’s crypto deposits, Signature’s problems were much more deep-rooted, Ahmed Ismail, CEO of liquidity aggregator Fluid, told Cointelegraph.
The bank served a tightly knit set of customers, including a group of startups and their investors. Ismail said that it aimed for rapid growth without adequately diversifying its business or clientele:
“Truth be told, businesses dealing with such tightly knit customer circles always face the risk of experiencing a domino effect.”
Petrov also doesn’t buy into the hypothesis that crypto is to blame for the banks’ collapse. Speaking to Cointelegraph, he highlighted the common problem of Silvergate and SVB, which was,…
cointelegraph.com