How the crypto industry reacts to recent bank bailouts

The early days of crypto were fuelled by a desire to cut the rigged banking system out of the people’s basic need to exchange goods and funds. However, as digital assets become more intertwined with a larger financial market, this tension is gradually fading. 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.

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 likely 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 become highly dependent on traditional banking and cannot contrapose itself as an alternative anymore? Is this 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 highlight 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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The overlap between the crypto community and the startup community has been significant, so there has naturally been a lot of support for the bank bailouts, Daniel Chong, CEO and co-founder at Harpie, explained: “I personally don’t see 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.

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.”

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.”

Some posit that it is the crypto industry itself whose financial stability is being undermined by interconnectedness with the banking system: more specifically, by the extreme limitations of that connection. The crypto market has been backed into a corner of the traditional banking system. Even before the collapse of Signature, SVB, and Silvergate, there were only a handful of entities willing to bank crypto companies. It’s impossible for a crypto company to diversify its assets across many different institutions since there aren’t 20 banks that will have it: “The idea that ‘crypto is too risky to bank’ has become a self-fulfilling prophecy. The few institutions willing to bank with crypto companies face very high demand from a market that has nowhere else to go. They become ‘crypto banks’ by default, and all the risks inherent in these fast-moving markets end up concentrated in a few institutions.”

What can the crypto industry do to escape the sudden dangers of relying upon banks? Not much. The paradox is obvious: Cryptocurrencies won’t need banks if they somehow become the major means of exchange and accumulation, but the only way for them to get to this utopian point lies through their interchangeability with fiat money. To Petrov, building a fence against TradFi looks like a counterintuitive idea. An independent world of crypto remains a great libertarian promise, but nothing more, he explained, “In the background of the meltdown of three huge crypto-friendly banks, we saw the surge of BTC for more than $8,000 in 10 days. This is evidence that there is no distance between fiat and crypto: They communicate as the venous circuit and the arterial circuit in a human organism.”

All in all, it is TradFi that has stepped in to support a bank that was crucial for the crypto industry. The crypto industry may or may not distance itself from TradFi, but if it does, it will either be tiny and unimportant or pose a systemic risk, Chapman said, stating, “Finance is either important, or we return to the caves. And whether that finance is traditional, crypto, or a combination, when things go wrong, a systematic crisis that could precipitate a disastrous global recession remains a danger.”

The crypto economy can continue improving its performance without directly conflicting with banks and similar traditional finance institutions, Ismail stated. It has already made finance more accessible and cost-optimized by cutting out cost-bearing intermediaries. Moreover, using cryptography and smart contracts in decentralized finance has enhanced the system’s security without compromising efficiency. But there’s nothing inevitable about the conflict between the two systems. Ismail thinks that traditional finance and the crypto economy can coexist without the cost of the other.

Chong doesn’t take this conviction for granted. In his opinion, we’re going to see a lot of value moving on-chain exactly as a result of such collapses within the traditional finance system. The question is whether the crypto market, with its own wave of devastating collapses in 2022, is ready to serve as a safe alternative to banks. In order to be the alternative to TradFi, the crypto industry would need to be ready to take on the full load of financial responsibility.


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