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| By Jurica Dujmovic |
In my most recent article, I had the opportunity to talk to some of the most prominent Weiss Ratings analysts about what transpired during the banking crisis we witnessed just a few short days ago.
While the majority of my colleagues believe this was a clear case of government hostility toward crypto — combined with bad management — it is understandable that other experts may disagree.
So, in today’s article, I want to go beyond our think tank by exploring some alternative takes on what really transpired during this most recent implosion of centralized finance.
I first spoke to Andrew Latham, a certified financial planner and director of content for SuperMoney.com.
I asked Andrew, “Who or what caused these banks to fail, and is it a clear-cut case of government/institutional incompetence? Or is there something more sinister at play?”
His response was in opposition to my colleagues’ opinions. He explained that, “The collapse of Silicon Valley Bank was a result of a panic-induced bank run caused by the venture capital community, which instructed their portfolio companies to move funds out of SVB.”
And the interconnected nature of the tech investing community played a crucial role in the bank's rapid decline.
I followed up by asking Andrew what he believed would be the future of TradFi, DeFi and the global economy.
His response was simple: “The collapse of SVB and the recent failure of Silvergate Bank have raised concerns about the stability of the financial system and the impact on the broader economy.”
Between the sudden need for fresh capital and the recent collapse of Silvergate, panic spread, leading to a staggering withdrawal of deposits from the bank.
This could have far-reaching consequences, such as startups being unable to pay employees, VCs struggling to raise funds and the deterioration of an already struggling sector.
And that’s just in TradFi.
When it comes to crypto, it remains to be seen whether the failure of traditional banks will lead to increased adoption of DeFi platforms.
In the future, it is likely that TradFi and DeFi will continue to coexist, but the balance may shift toward more decentralized and community-driven financial systems.
Andrew's comprehensive analysis aside, one statement he made stood out to me. He said, “The[se] events highlight the need for a robust and reliable financial infrastructure to support the growing crypto ecosystem."
This serves as a compelling introduction to the insights of Samuel Cohen, head of business development at Foreman Mining, a management platform for cryptocurrency miners.
According to him, “The recent banking crisis has once again highlighted the fragility of centralized financial institutions, and many experts argue that fractional reserve banking is a key factor in the problem.”
Essentially, under fractional reserve banking, banks are only required to hold a fraction of their customers' deposits as reserves, while the rest can be loaned out or invested.
While this can help stimulate economic growth and expand credit availability, it also increases the risk of bank runs and systemic financial crises.
In the recent banking crisis, risky lending practices and inadequate risk management played a role, but the fractional reserve banking system exacerbated them.
When too many customers tried to withdraw their funds at once, banks were unable to meet the demand, leading to a collapse of both the banks and confidence in the banking system.
This is where Bitcoin (BTC, “B+”) comes in as a potential solution.
Bitcoin operates on a decentralized ledger system that does not have the same risks and vulnerabilities as traditional banks.
By eliminating the need for intermediaries like banks, Bitcoin provides users with greater control over their financial assets and reduces the risk of systemic financial crises caused by fractional reserve banking.
Samuel concludes, “Looking to the future, it is likely that we will see continued debate and discussion around the role of fractional reserve banking in the financial industry, as well as the potential benefits and risks of Bitcoin and other cryptocurrencies. As governments and regulators seek to promote stability and prevent financial crises, it is important that they carefully consider the potential implications of different financial systems and work to strike a balance between innovation and regulation.”
There you have it.
In addition to Andrew and Samuel, I have also reached out to other crypto experts for their insights.
It appears that there is a general consensus among experts in the crypto space regarding the fundamental factors that led to the implosion of these banks:
1. The recent banking crisis has exposed the weaknesses and vulnerabilities inherent in the TradFi system. The interconnected nature of the tech investing community, risky lending practices and the fractional reserve banking system have all played their part in the failure of these centralized financial institutions. The traditional finance system needs a robust and reliable infrastructure to better support the growing crypto ecosystem and withstand future crises.
2. The adoption of decentralized solutions, like Bitcoin and other blockchain-based technologies, can provide users with greater control over their assets and reduce the risk of systemic financial crises. However, striking the right balance between innovation and regulation remains a challenge for heavily biased governments and regulators around the globe.
The future of finance is uncertain, but one thing is clear: The inadequacies of TradFi have been brought to light.
As we move forward, it is essential that the lessons learned from this crisis are used to reshape the financial landscape, fostering a more resilient and innovative ecosystem that can better serve the needs of individuals and businesses alike.
Best,
Jurica
