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This Crisis Can Change Crypto’s Role

The collapse of three major banks has spurred a ton of worries. As many are seeing parallels to 2008 and 2013’s financial crises, there’s more than meets the eye.

Crypto observers have echoed thoughts that the fall of Silicon Valley Bank, Silvergate Bank and Signature Bank may be bitcoin’s ‘Cyprus moment’, and can mark a significant turning point where people may be open to adopting crypto.

Ten years ago, bitcoin (BTC) experienced massive price rallies during the 2012-2013 Cyprus banking crisis, as local authorities enforced a 10% on banking withdrawals, prompting Cypriots to consider a form of bankless digital currency.

Now, crypto watchers are hoping for this same positivity towards crypto in the mainstream realm as more people realise that current banking systems in place are failing, as people are starting to lose confidence in the banking intermediaries they once trusted.. 

Cryptocurrency, known and loved for being censorship-resistant and intermediary-free, unfortunately has a bad rep in public consciousness – and is now up for its latest test against the bigger financial establishment.

Is history repeating itself?

Bitcoin, the world’s leading cryptocurrency, emerged out of the 2008-2009 financial crisis, out of dissatisfaction from bank bailouts, and how traditional banking systems have conducted themselves.

The crisis pointed a spotlight on how we depend too much on banks to run how we do payments, and how their mismanagement can render entire economies vulnerable due to mismatches in their accounts, investments, and liabilities, and the uglier side of banking.

As larger banks were “too big to fail” – an idea that governments would always eventually bail bankrupt banks to keep the economy afloat to leverage high-risk high-return bets – such exploits highlighted how Wall Street has the US democracy in the palm of its hands. But why is this being brought back up again?

Over the past year, the US Federal Reserve has implemented aggressive rate hikes, combined with a balance sheet reduction that prompted the Silicon Valley Bank crisis, sparking curiosity for those who are eager to self-custody their own assets.

Upon the downfall of three high-profile banks sent a wave of anxiety regarding outflows in regional banks. In response? The US Fed established a new bank backstop, reportedly to inject as much as $2 Trillion back into the system, while Switzerland’s central bank bailed out Credit Suisse with $54 billion.

Additionally, the US Fed and Federal Deposit Insurance Commission had been up in arms last weekend to establish a funding plan to ensure startups with deposits at Silicon Valley Bank (SVB) would meet  payroll this week.

So it’s no surprise that the “too big to fail” phenomenon is still happening – and can domino into widespread chaos. While there’s still many similarities, causes, and effects of this current financial crisis compared to 2009’s, a poor decision made back in that time ended up creating this current crisis.

In 2009, the Fed launched a “quantitative easing” program, which transferred excesses of Silicon Valley’s venture funds, which then in turn ended up funding a ton of startup activity. As companies deposited their funds at SVB, SVB decided to direct their funds to long-term US government bonds and mortgage-backed securities.

However, once January 2022 rolled, the Fed decided to aggressively hike price rates upon noticing sustained inflation. These rate hikes ended up tanking the bond market, resulting in massive losses from SVB as they had not hedged their interest rate risk.

As more depositors now turn to Wall Street’s too-big-to-fail institutions as a ‘failsafe’ way to keep their money, it’s only more obvious that our economy will be wholly dependent on a whole group of centralised elite bankers that already have too much power.

Crypto vs. Fiat

As there’s no intermediaries from payments, and having monetary policy being rigidly embedded in the system itself, crypto finds purpose in being an alternative to fiat currencies run by central banks in coordination with private banks.

At the same time (and historically), bitcoin’s price has rallied on bets whether it will prevail upon banking crises. 

However, things aren’t looking so peachy for crypto, bitcoin, and the rest of the crypto world.

This banking crisis also included banks that crypto firms were dependent on. Silvergate Bank, known for its heavy exposure to failing crypto firms, brought anti-crypto politicians to call for tough measures on the industry, but the bank’s actual exposure to crypto was proportionally low in comparison.

As a result, authorities took to partnering with financial institution gatekeepers in order to pressure the industry, as what happened with crypto favourite Signature Bank last week. Crypto  firms that had banked with SVB, Silvergate, and Signature had been repeatedly rejected by bank compliance officers as they scramble to open up alternative accounts.

While the New York Department of Financial Services (NYDFS) insists that Signature’s shutdown wasn’t related to crypto, but rather a “crisis of confidence” in its leadership, Signature was still solvent, and didn’t deserve a shutdown – and may be another episode in the war between the crypto industry and US regulators.

But if the NYDFS did abuse its power in shutting down legal crypto businesses in cooperation with federal agencies, there’s nothing the industry can do, quite yet.

Confidence in crypto

If things continue to run its course in the fiat world, people will grow more open to the idea of crypto…right?

While bitcoin’s self-custodial model may prove to be an increasingly attractive factor to get into crypto, there is, without a doubt, going to be a complicated clash between crypto and fiat – and would also result in new regulatory frameworks created by governments to welcome digital money in their own terms.

As world governments are scrambling to establish their own central bank digital currencies (CBDCs), some speculate that governments are also using these digital currencies as a method to gain back the control that they thought they lost from crypto.

Meanwhile, crypto is also dealing with its own dilemma of distrust. As there’s wavering confidences for both fiat and crypto, whoever develops the most trust at the end of this banking crisis may emerge victorious.

Again, only time will tell for what the future of money –  and for crypto to be a part of it, a mindset that sparks mainstream confidence for crypto would have to be achieved.

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