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What Fiat’s Rapid Bank Runs Can Learn From Crypto

“The speed of the run – it’s very different from what we’ve seen in the past,” says Federal Reserve Chair Jerome Powell on the Silicon Valley Bank run.

Over the years, many financial experts have been of the opinion that there’s one factor that distinguishes crypto between traditional banking: stability. 

In their eyes, most people tend to put their money, indefinitely, into an established bank. Due to the image of these established banks providing stability, depositors find comfort, satisfaction, and other factors, leading to constant loyalty for these banks to handle their assets.

However as we’ve seen in the past, this sort of stability isn’t quite common in crypto. 2022 marked lightning-fast withdrawals from crypto firms FTX, Celsius Network, and Voyager Digital, which snowballed into more withdrawals, as other depositors choosing to jump ship upon believing there’s trouble on the horizon.

The recent failures at Credit Suisse, Silicon Valley Bank (SVB), and Signature Bank have shown us that astonishingly fast deposit runs can also happen at traditional banks too. And it’s unsurprising if we were to draw comparisons between these failures and the rapid crypto withdrawals in 2022.

What happened with Credit Suisse, SVB, and Signature became a rude awakening for both regulators and industry executives that even the slightest bad buzz or rumours on social media can turn online banking processes to become an easy tool to drive a bank to ruin.

Much like what’s usually the case with crypto, online banking only requires an internet connection for a customer to move their money from one bank to another. But, while crypto is notorious for having small intricacies, a traditional banking system’s setup looks quite different.

A reason to not keep things “sticky”

Banks typically run with the mindset that most customer deposits are “sticky”, meaning that these deposits are a form of long-term funding, despite the fact that they can be redeemed by the depositor on demand.

As banks run with the optimistic assumption that these deposited funds won’t be pulled out in a split second, banks gain the confidence to also lend money out to credit card users, those who’ve pulled out a mortgage, car buyers, other companies, and real-estate developers. Sometimes, banks even use these funds to invest in long-term bonds that may not return profits for years.

This mode of operation however can be quite dangerous for the traditional economy and financial system. If deposit funding isn’t available, they also may not be able to provide long-term credit.

As SVB suffered from an outflow of $42 billion on March 9 (according to the Wall Street Journal), the bank had to navigate the intricacies of the US banking system in order to get a multibillion-dollar cash infusion in a single day – only to be ultimately shut down by regulators just before the rescue. 

This sort of speed in bank runs is new to the traditional finance industry, and crypto may end up not looking so bad in comparison, if money moving at high speeds over the internet were to be more commonplace. That then, would dispel the image that mass withdrawals of internet  money can only happen in the emerging blockchain-based finance world.

“It’s a new world with very fast digital runs on the bank,” said Lex Sokolin, chief cryptoeconomics officer at ConsenSys.

While online banking has already been here for a while, once fiat decides to implement features for ultra-fast-moving deposits, the whole industry will change forever, and bank runs in fiat may happen more quickly than expected.

Now, it only would take a few clicks and seconds for a transaction from one bank account to  another to happen. With online banking, it’s become much easier for customers to jump ship from one fiat bank to deposit their assets to another bank when anxiety arises, speeding up how bank runs can happen in the fiat world.

Not to mention, there’s the element of social media. With an influx of press releases, online news reports, and Twitter ‘smart guys’, fiat bank runs can now happen on shorter notice, rendering banks unable to keep up with cash outflows, and having to shut down business.

“Despite the central bank’s aggressive actions, confidence in the banking system – especially regarding small- and medium-sized regional banks – remains fragile, as lots of uncertainty and concerns remain,” Nationwide Chief Economist Kathy Bostjancic wrote in a note previewing Wednesday’s Federal Open Market Committee meeting.

FUD doesn’t exist just in crypto

As widespread panic for a bank run builds up in the fiat world, crypto traders are already familiar with these processes.

As phrases like “uncertainty” and “lack of confidence” are already so prominent in the crypto community, crypto traders are already familiar with the idea that crypto, specifically stablecoins, aren’t good options for savings, as government officials have been constantly warning users on the risk of ‘runs’.

Fiat banking benefits from the idea that it’s stable, and once that perception of stability is gone,  then fiat banking isn’t quite different from crypto. 

Without stability, fiat banking’s main advantage over crypto is just the fact that it’s supported by  a government, and that these banks are able to recover as governments are eager to rescue them through deposit insurance, and creating borrowing facilities.

Not to mention, the US Federal Reserve was founded in 1913 as a direct response to frequent bank runs that happened in the late 19th and early 20th centuries – and a huge portion of the idea of bank stability is built upon that.

Confidence in the future

“A fragile banking system is likely to encourage investors, especially of the younger generation, to hold at least some of their wealth in an ’insurance asset’ such as bitcoin,” says Noelle Acheson, former head of research at CoinDesk and Genesis Trading.

As more supervised (and centralised) banks have been tumbling fast and hard over the past month, regulators and those in the fiat industry have a lot to reconsider.

As things look bleak for fiat, crypto has already gone through many slumps, and is resilient in relearning and taking notes from previous financial crises the hard way – but both financial systems are very reliant on good press for things to recover.

As crypto proponents have been quick to call cryptocurrencies a ‘safe haven’, these claims have shot up crypto prices, resulting in bitcoin (BTC) reaching the $28,000 mark for the first time in nine months this Monday.

Meanwhile, as the Fed established new emergency lending programs for banks affected by the failures of SVB and signature, Powell said that “it’s having the intended effect of bolstering confidence in the banking system.”

Although crypto doesn’t have such a safety net provided by government forces, the White House Council of Economic Advisers has noted that “digital-asset proponents are now aspiring to create a decentralised financial system without relying on governments and their regulatory frameworks.”

But what would happen once the government fails? Crypto is prepared to handle such situations in its inherent design, but not fiat.

Maybe, people will gain more confidence in crypto even more so than fiat finance once crypto finds their answer towards stability.

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