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Home » U.S. banks, crypto myths, and realities

U.S. banks, crypto myths, and realities

bySheila Warren
March 24, 2023
in News Analysis
Problems at SVB are the same problems at banks across the U.S., and the cause comes from outside tech or crypto.

The latest White House economic report mentions crypto over 200 times, but focuses on risks and challenges. Meanwhile, some continue to allege that the failures of Silicon Valley Bank (SVB) and Signature Bank were caused by their embrace of “risky” crypto-focused businesses. These rhetorical arguments miss the mark. The reality is that the problems at SVB are the same problems at banks across the U.S., and the cause comes from outside tech or crypto. If the US pushes crypto offshore rather than regulating it, we will wind up releasing fact sheets on bringing crypto back, just like we are doing with semiconductor chips.

Interest rates, government-backed securities and depositor sentiment

The crux of the problem doesn’t sound like a problem at all: as its business grew, SVB put about $90 billion of its assets into government-backed securities. In general, this is about as safe an investment as one could make. Sure, those securities carried interest rates that were pinned to the floorboards thanks to a decade-plus of suppressed rates, but they were still a profitable and safe investment. And SVB wasn’t the only bank in that market of course. 

The problem started when the Federal Reserve began its program of reversing its low-rate policy. Suddenly the low-interest debt held by SVB would lose them money if the bank was ever forced to sell it. Ironically, by investing in such safe instruments, the bank was essentially insolvent. Again, in this it was not alone. At the end of 2022, U.S. banks were sitting on nearly $700 billion of securities that would have been money-losers if sold; they are technocratically referred to as “unrealized losses.”

So long as the bank wasn’t forced to realize those losses, however, it could remain open. There were a few voices warning about this before recent events, but nobody seemed to be listening. Then SVB’s depositors started getting nervous. The same could happen for many other banks as well, which is why the Federal Reserve and U.S. government stepped in. And that has nothing to do with cryptocurrencies.

Indeed, this month’s crisis can really trace its genesis all the way back to 2008, when the government first began saving banks. Rather than forcing banks to actually operate in an open market, rules were changed and the playing field tilted. Once again, being a bank was a literal license to print money.

The bitter irony of all this is that bitcoin’s initial promise was as an alternative to the existing banking world that collapsed so horrifically in 2008. But the financial system didn’t seem to learn the lessons of 2008. Banks lived in the protective cocoon of Too Big to Fail rules, and some folks in crypto took advantage of the lack of regulatory clarity to play every bit as recklessly as the worst financial actors. 

Shutting Down Crypto in the US will only drive activity offshore

That isn’t a reason to banish crypto, though. Trying to shut down the crypto market in the U.S. will only drive activity offshore. There it will either go to jurisdictions like Japan that have already built a regulatory regime, or it will go to places like the Seychelles or the Caymans, jurisdictions  that provided the kind of regulatory fig leaf that allowed crypto fraud to flourish in the first place. That would put crypto users at heightened risk, and as we saw last year, poorly managed companies are likely to implode amid a downturn.

A publicly traded corporation like Coinbase is as transparent as any other company that trades its equity on stock exchanges. But most crypto companies are not nearly that transparent. The industry itself needs to take – and is taking – responsibility for the environment that allowed the grievous mismanagement at firms like Voyager Digital, Three Arrows, and FTX. 

But the industry can’t do it alone. The goal should be to bring as much of crypto as possible within a regulatory framework. To benefit from blockchain technologies and blockchain-based services and products, it is vital to keep the crypto ecosystem on US soil and governed by US regulations, while promoting innovation and building clear regulatory guidelines to ensure consumers are protected. 

Government actors did what they needed to do in regards to SVB. The kinds of businesses that were SVB’s clients are integral to our increasingly digital economy. Many were small businesses, and many were also venture-backed tech and life-sciences companies as well as healthcare IPOs. Nonprofits, foundations and donor-advised funds relied on SVB’s services as well.

I’ve shared some of the skepticism of tech companies, even crypto companies. But painting the entire industry with the broad brush of “evil technologists” misses the mark. Once the current crisis is resolved, a renewed focus on bringing the U.S.-based financial system into the 21st century should begin again, and the technology behind cryptocurrencies can and should be a part of that effort.

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