Bank crisis may push investors towards asset diversification that does not rely on banks

Traditional systems have proven vulnerable to failure and manipulation

By Jeetu Kataria

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Customers and bystanders form a line outside a Silicon Valley Bank branch in Wellesley, Massachusetts. - AP
Customers and bystanders form a line outside a Silicon Valley Bank branch in Wellesley, Massachusetts. - AP

Published: Fri 17 Mar 2023, 5:21 PM

Last updated: Fri 17 Mar 2023, 6:23 PM

As we assess the current state of the banking industry, it appears we are treading a road we’ve travelled before. Over the past week, three US banks — Silvergate Capital Corporation, Silicon Valley Bank and Signature Bank — have failed due to a series of unfortunate events. This was not surprising, but nonetheless concerning.

We find ourselves yet again in the throes of a banking crisis, one that seems destined to be solved by the all-too-familiar story of debasing the currency and printing more money. But let us not mince words, this is not a bailout, at least not in the traditional sense. No, the Federal Reserve is not simply “backstopping customer deposits”.

The Federal Reserve has announced its intention to “backstop customer deposits,” as a necessary step to prevent further damage to the US tech industry. However, we must consider the long-term implications of such actions. Is constant market intervention truly the answer? Or are we merely delaying the inevitable consequences of such strategies?

What we need to confront is that the current financial system is not a free market, but a highly controlled one. As we navigate this crisis, we must be mindful of the potential consequences of our actions and how they will impact the future. But before that, let’s run through what happened. The earlier collapse of FTX has had far-reaching effects across the financial landscape, and one of the most notable casualties has been Silvergate.

As one of FTX’s major clients, Silvergate Bank reported a staggering $1 billion in losses for the final quarter of 2022. In response, at the beginning of March the bank announced its plans to wind down operations and voluntarily liquidate.

On March 10, regulators shuttered SVB and seized its deposits in what is being termed the second-largest US banking failure since the 2008 financial crisis. The company’s downward spiral began late on Wednesday when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet.

Jeetu Kataria, CEO, DIFX Technology. - Supplied photo
Jeetu Kataria, CEO, DIFX Technology. - Supplied photo

It is worth noting that a considerable number of startups in Silicon Valley have accounts with this bank, primarily because of its location. Imposing restrictions on these accounts could have a significant impact on the operations of these startups. Some observers may interpret this development as a potential sign of trouble ahead for the bank, and perhaps even for the broader startup ecosystem it serves.

What followed was the rapid collapse of a highly respected bank that had grown alongside its technology clients. Similarly, Signature, another contender for the most “crypto-friendly” bank, was also shuttered by regulators, making it the third-biggest banking failure after SVB.

Compared to SVB and Silvergate, Signature didn’t have loans backed by cryptocurrencies or hold cryptocurrencies on its balance sheet. Instead, it had a payment platform for processing crypto transactions. But deposits associated with the crypto platform had been dropping, prompting some concern from Wall Street. With sentiments being all over the place and in efforts to avoid SVB’s scenario, poor old Signature became the next in line for the guillotine. But the important thing to note here is that these banks did not fail just because of the volatile cryptocurrency market. These collapses and seizures by regulators highlight the ongoing risks and uncertainties and lack of direction that is still faced by traditional markets.

So what’s the solution? It definitely can’t be printing more money!

With the recent CPI data release, some are hoping to gain insights into the best way forward. However, it’s unlikely that simply hiking interest rates will alleviate the pressure on the financial system. Monetary policy is not something that can be adjusted on a whim like turning up the temperature of an oven.

To make matters worse, the Fed’s previous assertion that inflation was “transitory” led many investors to believe that low-interest bonds were a safe bet. They trusted in Powell’s guidance. But now, with the Fed’s recent admission that they were wrong, investors are left wondering who to trust and what to do next. On the flip side though, the Fed can still carry forward with having to curb inflation as its main plan, and we might see a continued tightening of monetary policy irrespective of the bank’s failure. As the Wall Street mentality goes, everything goes up until something breaks!

What does this mean for the crypto market?

You might have expected cryptocurrency to plummet when a crisis of confidence hit the markets. Instead, what we see is a rise in Bitcoin and an increasingly apparent financial system that is showing its limitations. As these flaws are becoming more and more pronounced, companies and individuals are starting to recognize the value of a financial network that is secure, decentralised, and data-driven. With the adoption of crypto assets on the rise and barriers to entry being broken, we expect to see some new players join the markets. We may even see a greater shift in traditional investor sentiment towards asset diversification that does not rely on banks.

No matter the outcome, one thing is for sure; the need for a new approach is more urgent than ever as traditional systems have proven vulnerable to failure and manipulation. It is high time to embrace a more advanced and trustworthy method of conducting financial transactions — one that empowers individuals and institutions alike.

Blockchain provides a means of achieving this goal, enabling a decentralised and permissionless financial network that is governed by code and offers enhanced security and transparency. Embracing this new paradigm may be a challenging transition, but the benefits of a decentralised financial system are simply too great to ignore.

Jeetu Kataria is CEO, DIFX Technology.

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