- Credit Suisse potentially revealed major vulnerabilities in the financial system, with implications for crypto.
- It also revealed a different culprit for the recent string of bank collapses.
- Depending on Fed’s policy, crypto could either go boom or bust.
Recent events in the banking sector, originating in the U.S., sent shockwaves through financial markets. Credit Suisse, one of the largest banks in the world, now finds itself in the eye of the storm. Facing a liquidity crunch, the giant scrambled to secure a lifeline from the Swiss central bank.
This systemically important bank has uncovered major fragilities in the global financial system. But what does this mean for crypto?
Did Crypto Cause the Credit Suisse Panic?
When Silicon Valley Bank collapsed earlier this week, many quickly blamed crypto. The unregulated crypto markets supposedly caused rampant speculation, impacting crypto-linked entities.
Their case became much weaker after the crisis in Credit Suisse. On March 15, the bank faced a liquidity crisis, losing more than one-quarter of its market cap. The next day, the bank secured a loan of up to $54 billion from the Swiss National Bank (SNB).
This loan narrowly helped the bank avoid the fate of Silicon Valley Bank, which collapsed just days before. Crypto-friendly Signature Bank and Silvergate Capital shut down amid financial woes.
Unlike the tech-friendly Silicon Valley Bank, Credit Suisse has no substantial crypto exposure. Its liquidity woes could be a sign of a vulnerability of the entire traditional financial system, not just tech and crypto.
What Does a Banking Crisis Mean for Crypto?
This global bank is so big that any crypto exposure would have been insignificant. Global financial regulators see Credit Suisse as a systemically important bank for the world’s economy. The Swiss bank shares this status with just 30 other major institutions.
The panic in such a major institution has jittered investors, contributing to growing market uncertainty. This has crypto investors asking; what does this mean for crypto? There are several scenarios to consider, and they all have to do with how the Fed assesses the state of the economy.
The Fed’s low interest rates contributed to a huge boom in tech and crypto, but they also caused inflation. The Fed had to slam the breaks to combat inflation, crushing the markets. Now, the Fed finds itself in a similar quandary.
If the Fed delays raising rates just right, this boosts the economy and crypto. Lower interest rates will boost investment in crypto projects, helping them potentially reach mass adoption.
However, if the Fed overshoots its target, this could lead to inflation. This would force the Fed to react and crash crypto prices again. Ignoring inflation could cause it to spiral out of hand, which is what recently happened in Turkey. The country saw an average rate of inflation of almost 48% in 2022, causing a total breakdown in the economy.
On the other hand, if the Fed does not react, panic could spread across the market, leading to a potential recession. A breakdown of the financial system is not conducive to the growth of any industry. This is especially true for tech and crypto, as these industries require major capital investments.
Could Crypto Replace Banking?
While it may be tempting to assume that Bitcoin or DeFi do well in a crisis, this is far from certain. The truth is the mass adoption of these networks is likely still in the distant future.
Bitcoin’s ecosystem still needs major investments (for instance, the Lightning Network) to make it a viable alternative to the current financial system. The same is even more true for Decentralized Finance (DeFi).
Ultimately, both crypto and the traditional markets rely on the Fed walking the tightrope between inflation and recession. If the Fed makes a mistake, the markets could face a recession. This is exactly why some view crypto as an alternative to the current system.
Read more about the bank runs on three crypto-friendly banks:
“Crypto Has Been De-Banked:” Impact of Signature, Silvergate, and Silicon Valley Bank Collapse
Read about the latest revelations from bankrupt crypto exchange FTX:
Sam Bankman-Fried and Insiders Took $3.2M from FTX: Filings