Stop Blaming Crypto for Traditional Finance Failures

After the recent collapse of three banks – Silicon Valley Bank, Silvergate Bank and Signature Bank – many pointed fingers at crypto as the cause. But crypto may actually be the solution, not the problem.

AccessTimeIconMar 16, 2023 at 12:45 p.m. UTC
Updated May 9, 2023 at 4:10 a.m. UTC
AccessTimeIconMar 16, 2023 at 12:45 p.m. UTCUpdated May 9, 2023 at 4:10 a.m. UTC
AccessTimeIconMar 16, 2023 at 12:45 p.m. UTCUpdated May 9, 2023 at 4:10 a.m. UTC

Recent news has been dominated by the collapse of several banks, including Silicon Valley Bank, Silvergate and Signature Bank – all of which provided vital services to the crypto industry by bridging the gap between blockchain technology and traditional finance.

However, some media outlets are quick to blame the crypto industry for these financial disasters. Is this fair, or are traditional financial institutions failing us again? Many crypto advocates argue that blockchain technology offers a solution to the issues plaguing traditional finance and it isn’t the problem.

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What happened to Silicon Valley Bank?

Silicon Valley Bank, the 16th largest bank globally with $210 billion in deposits, recently experienced a devastating collapse that impacted the global financial system. As a leading provider of banking services to nearly half of the United States' venture capital-backed technology and life-science companies and over 2,500 venture capital firms, the bank's downfall had a significant effect on the technology and financial sectors.

The collapse can be traced back to the bank's investment strategy, which involved placing a substantial portion of its funds into Treasurys. As interest rates rose, the value of lower-yielding Treasury bonds declined, with new issues offering higher interest rates entering the market. Holding these bonds to maturity would usually have mitigated the impact of interest rate fluctuations. However, the situation worsened when depositors began withdrawing their funds en masse.

On March 8, Silicon Valley Bank publicly revealed its losses, leading to a massive sell-off of its stock on March 9. The bank attempted to raise $2 billion in capital to stabilize its financial position, but this move was met with skepticism, fueling further panic among depositors. A bank run ensued, forcing the bank to liquidate its Treasury holdings at a steep discount, exacerbating its losses.

Ultimately, the situation spiraled out of control, and the Federal Deposit Insurance Corporation (FDIC) had to step in to take over the bank. The FDIC's intervention is thought to be necessary to prevent further damage to the financial system and to protect depositors' funds.

How does the SVB collapse affect crypto?

There are a number of ways this situation affects the crypto industry negatively overall, including the following:

  1. Loss of banking services: Crypto companies and startups that relied on Silicon Valley Bank's services now face operational disruptions and financial challenges as they scramble to find alternative banking partners.
  2. Reserve instability and illiquidity: The collapse of SVB sent worries through the industry as the bank was revealed to have held reserves for the USDC stablecoin. Other crypto companies, including Ripple, also had announced exposure to the bank
  3. Reduced investor confidence: The collapse has raised questions about the stability and sustainability of the crypto ecosystem, which may lead to decreased investments and slower growth in the sector.
  4. Increased regulatory scrutiny: The failure of a major bank involved in the crypto industry is likely to prompt regulators to push for stricter regulations to protect investors and maintain financial stability.
  5. Short-term price volatility: The collapse has caused temporary fluctuations in the prices of cryptocurrencies because panic selling and uncertainty around the implications of the collapse affect the broader industry.

Accelerate crypto adoption

Bank failures can expose the vulnerabilities of traditional centralized financial systems, prompting individuals and businesses to explore alternative solutions. The shortcomings of these systems, such as single points of failure, inefficiencies and the potential for mismanagement, can encourage more people to turn to decentralized financial systems like blockchain and cryptocurrencies, which offer increased security, transparency and autonomy.

As traditional financial institutions falter, blockchain technology and cryptocurrencies can emerge as more reliable and secure alternatives, building trust among users. The transparency, immutability and consensus mechanisms in blockchain technology can foster a higher level of confidence in the data and transactions recorded on the network. In times of financial instability, individuals and businesses may also view cryptocurrencies, particularly those with limited supply and strong fundamentals, as a hedge against traditional financial risks, driving up demand and potentially accelerating adoption.

Bank failures can also serve as a catalyst for innovation, creating demand for better financial solutions. Entrepreneurs and developers may seize this opportunity to create new blockchain-based financial products and services that address the shortcomings of traditional banking systems. This can include innovations in cross-border payments, lending and asset management.

Moreover, bank failures may disrupt cross-border transactions, making it more challenging for businesses to make payments or transfer funds internationally. Blockchain and cryptocurrencies can offer faster, cheaper and more secure cross-border transactions, making them an attractive alternative for businesses dealing with international partners.

Finally, the collapse of traditional financial institutions may prompt regulators to scrutinize financial systems more closely, potentially leading to clearer regulations and guidelines for blockchain and cryptocurrencies. Regulatory clarity can encourage more businesses and individuals to adopt these technologies, as they can better understand the risks and benefits involved.

Blockchain may actually be the solution

The situation with Silicon Valley Bank has exposed the vulnerabilities and shortcomings of traditional banking systems. However, blockchain technology holds the potential to revolutionize the financial sector by addressing these long-standing issues. Far from being the problem as pointed to in the media, blockchain emerges as a solution by providing a decentralized, secure and transparent financial system.

Its capacity to foster trust, prevent fraud and facilitate efficient transactions establishes it as a viable alternative to centralized banking. By capitalizing on blockchain's inherent strengths, the financial sector can surmount vulnerabilities, inefficiencies and mismanagement, ultimately paving the way for a more resilient, innovative and clean financial ecosystem.

As we learn from the Silicon Valley Bank collapse, it's crucial for the financial industry to adopt and embrace blockchain technology to prevent similar crises in the future. By leveraging the unique advantages of blockchain, we can create a more robust and reliable financial infrastructure that benefits businesses, individuals and the global economy as a whole.

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DJ Windle is the Founder and portfolio manager at Windle Wealth, where he manages the Income Growth and Crypto portfolios. He is a contributing writer for CoinDesk's Crypto for Advisors newsletter.