- The recent crash of three crypto-linked banks sparked fear in the tech industry.
- Some are looking at crypto to help prevent future crises.
- Crypto is already helping people in countries suffering extreme financial crises.
The global financial system is showing cracks, with a potential for a major crash looming. Many seek better alternatives, with bank runs and bailouts becoming more common. Some believe that could be crypto.
The U.S. has seen a surge in bank collapses in recent months. The collapse of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital has raised alarms, especially in the tech and crypto sectors.
Silvergate and Signature were the two main banks for crypto companies. Even more significantly, SVB had numerous crypto startups and venture capitalists as customers. Many held millions of dollars in the bank. Its collapse could have spread ripples across the sector, causing untold damage to the tech industry.
Sponsored
To prevent the fallout, the federal government had to step in and guarantee all deposits in the bank. However, the crisis also exposed a need for alternatives to the current system.
Why Did SVB, Signature, and Silvergate Fail?
All three banks experienced failure due to a combination of factors that exposed their vulnerabilities. However, SVB, Signature, and Silvergate were closely tied with the tech startup and cryptocurrency sectors.
Tech and crypto saw a major rally in 2020-21 during the Covid pandemic. A combination of social distancing and money printing boosted the value of high-growth tech companies. However, the excess money printing finally caught up with the economy.
Sponsored
In 2022, the Federal Reserve started raising interest rates, causing the tech and crypto bubble to deflate. Trillions of dollars in tech stocks and crypto valuations disappeared overnight. Major tech companies started laying off thousands of employees.
The collapse of tech and crypto impacted the banks that had them as customers. SVB, Signature, and Silvergate all suffered partly due to their exposure to tech companies. However, they may be the first to fall as this crisis ripples the economy.
What Will Happen to SVB Depositors?
To prevent further contagion, the federal government decided to step in and guarantee all deposits in SVB.
Normally, federal deposit insurance covers $250,000 per person per bank account. That means that the federal government makes depositors whole up to that amount whenever a bank fails.
However, many tech and crypto businesses had much more money in SVB. This includes one major stablecoin issuer, which had $3.3 billion in the bank. Businesses like these stood to lose most of their deposits had the Treasury decide not to step in.
That’s why crypto prices rallied after the news, as the bailout reassured crypto investors. For the first time in months, Bitcoin reached $25,000.
Did the U.S. Government Bail Out SVB?
The federal government took extraordinary measures to support SVB’s depositors after the bank’s collapse. However, they did not bail out SVB shareholders, as they would lose all their money.
That’s why the Biden administration doesn’t want to call their intervention a bailout. Still, the federal government did decide to backstop $175 billion in deposits in the SVB. Some argued that there was a bailout, not of Silvergate, but of the crypto and tech industries.
Ultimately, the risks stemming from a centralized financial system required a centralized solution. Yet, it is unclear whether the government will manage to prevent a future crisis.
Can Crypto Solve the Banking Crisis?
As the banking system reveals its fragility, some believe cryptocurrencies could solve the problem. But can crypto help prevent future crises like these? Crypto supporters say yes. The decentralized nature of cryptocurrencies could help mitigate the risks to traditional banks.
At the same time, critics dispute these ideas, saying that crypto was at the heart of the banking collapse.
How Can Crypto Help in a Financial Crisis?
In the case of SVB, the federal government stepped in to prevent the crisis. However, some argue that the government and the fed were behind the causes of the collapse. In either case, there are many examples of institutional failure across the globe.
Governments and central banks can make the wrong decisions that create crises or worsen existing problems. When that happens, consequences for the rest of society can be dire. Hyperinflation, shortages of essential goods and services, and freezing deposits can all happen in that case.
Cryptocurrency can mitigate the risks of all these issues. Assets like Bitcoin can help against inflation. In addition, unlike bank accounts, governments can’t freeze crypto wallets.
Significantly, crypto adoption picked up exactly in countries that recently suffered the most financial hardship. Examples include Venezuela, Turkey, and Lebanon. In all these cases, crypto was a stability factor in an otherwise unstable financial system.
Could Crypto Reduce the Risk of Financial Crises?
So far, crypto has helped against financial instability in countries experiencing total collapse. One day, it could help overhaul the entire global banking system. In particular, the decentralized nature of cryptocurrency could one day reduce the systemic risk to the financial system.
Unlike traditional banks, cryptocurrencies operate on decentralized networks. In such a system, a single point of failure will not have as significant an impact on the entire system. This reduces the need for government intervention or bailouts in a crisis.
Crypto is also permissionless, offering more security and stability than traditional, centralized finance. By eliminating the need for intermediaries, permissionless systems are more resistant to human error or fraud.
Crpyto could also help prevent inflation. Digital currencies like Bitcoin also have a finite supply, potentially resisting inflation. Unlike fiat currency, governments can’t create more Bitcoin out of thin air. On the other hand, this would also reduce the need for governments to step in when inflation is high.
Will Crypto Replace Banking?
It is impossible to know what the future holds for the financial system. However, fintech firms and crypto will likely play an increasingly important role.
Firms that leverage technology, especially decentralized tech, are in a position to offer better and potentially more secure services to users. However, crypto still has a long way to go to achieve that goal.
To become an alternative to banking, crypto has to become much more decentralized than it actually is. Despite its potential for decentralization, most crypto projects are in the hands of a few venture capitalist investors. This makes crypto prone to systemic risks, like in the case of the collapse of SVB, Signature Bank, and Silvergate Capital.
Once the industry gains more adoption, it will likely become more decentralized. This will enable crypto to radically transform banking, finance, and probably every other industry.
Read more about what the SVB collapse means for crypto:
“Crypto Has Been De-Banked:” Impact of Signature, Silvergate, and Silicon Valley Bank Collapse
Read about the impact of the SVB crisis on a major crypto stablecoin:
USDC Repegs as Treasury Steps in – Major Crisis Averted?
