This Crisis Will Define the Future of Money

The recent collapse of three high-profile banks - Silicon Valley Bank, Silvergate Bank and Signature Bank - has caused worrying outflows at hundreds of regional banks. Now, with the U.S. Federal Reserve creating a new backstop facility reportedly worth $2 trillion, the echoes of crises in 2008 and 2013 are loud.

AccessTimeIconMar 17, 2023 at 6:11 p.m. UTC
Updated Jun 14, 2024 at 7:34 p.m. UTC

Ten years ago, a strange new digital currency called bitcoin (BTC) caught my attention for the first time as its price surged during the Cyprus banking crisis. Local authorities had infuriated Cypriots by slapping a 10% tax on withdrawals, unwittingly encouraging some to warm to the idea of bankless digital money.

Per Omkar Godbole’s reporting, I’m not alone in seeing parallels between the past week’s events. Again, bitcoin’s price has rallied on speculation that stress among U.S. and European banks will open people’s eyes to the leading cryptocurrency’s censorship-resistant, intermediary-free qualities.

But if this is bitcoin’s “Cyprus moment,” the context is very different from 2013. With crypto now embedded in public consciousness – negatively, mostly – the industry faces its biggest ever test, one that involves an intensified struggle with the financial establishment.

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With thousands of people next month joining CoinDesk’s annual Consensus conference in Austin, Texas, to discuss crypto’s challenges and opportunities, the community now has a narrow opportunity to seize the day and define the future of money.

Echoes of 2008-2009

Recall that the Bitcoin blockchain was born out of the chaos of the 2008-2009 financial crisis, with Satoshi Nakamoto’s immortal timestamp on Jan. 3, 2009, inscribing a headline from that day’s London Times: “Chancellor on the brink of second bailout for banks” (chancellor being the U.K.’s finance minister).

That crisis highlighted how our dependence on banks to run the plumbing of our money and payments leaves the entire economy vulnerable to mismatches in banks’ investments and liabilities, which can undermine their ability to honor deposits. And it showed how the largest banks, whose interwoven credit exposures create “systemic risk,” exploited their “Too Big to Fail” status – the idea that governments would always bail them out to protect the economy – to place asymmetric, high-return risky bets. It showed how Wall Street (and other financial centers) in effect, hold our democracies hostage.

Now, with the collapse of three high-profile banks, hundreds of regional banks facing worrying outflows, the U.S. Federal Reserve creating a new backstop facility reportedly worth $2 trillion, and Switzerland’s central bank bailing out Credit Suisse to the tune of $54 billion, the echoes of that prior crisis are loud.

As the Fed and the Federal Deposit Insurance Commission scrambled last weekend to put a funding plan in place so that thousands of startups with deposits at Silicon Valley Bank would meet payroll this week, we got a flashback to Sept. 17, 2008. On that day, two days after the collapse of Lehman Brothers, the Reserve Primary Fund – used by companies to manage their cash reserves – “broke the buck.” We feared that failures at similar short-term money market funds would lead to widespread chaos in the economy-wide system for paying employees and commercial contractors.

It’s not only the familiarity that’s striking here. It’s also the cause and effect. A direct line can be drawn from SVB’s failure to the policies introduced in the wake of that prior crisis.

In 2009, with a divided U.S. government unable to agree on fiscal solutions to revive growth, the Fed launched what would become a multi-year “quantitative easing” program, delivering a surfeit of dollars that left Silicon Valley’s venture funds flush with money that they poured into startups.

Those companies deposited the funds at SVB, which in turn made what must have seemed a conservative investment choice at that time: It plowed the cash into long-term U.S. government bonds and mortgage-backed securities. The problem was that in January 2022, once the Fed finally acknowledged that its easy-monetary policies had stoked sustained inflation, it started aggressively hiking rates. This tanked the bond market and lumped massive losses on SVB, which had made the fatal error of not hedging its interest rate risk.

Now, as fear spreads to smaller regional banks, depositors have fled en masse into Wall Street’s too-big-to-fail institutions, making them even bigger. To an unprecedented degree, that will position an elite group of bankers as gatekeepers of our economy – a centralizing power that’s already showing signs of overreach.

Crypto as the bad guy

Bitcoin’s raison d'être has always been that, in removing intermediaries from payments and hard-coding monetary policy into a predictable issuance schedule, it offers an alternative to the centralized model of fiat sovereign currency run by central banks in coordination with private banks, and so mitigates the entrenched vulnerabilities exposed by this past week’s events.

At first blush, however, the news hasn’t been good for Bitcoin and the rest of the crypto community.

Silvergate Bank, the first of a trio to collapse, was brought down in part by its heavy exposure to failing crypto firms. That encouraged anti-crypto politicians like U.S. Senator Elizabeth Warren (D-Mass.) to call for tough measures against the industry, helping feed a guilt-by-association impact on SVB, although that bank’s actual exposure to crypto was proportionally quite low.

With authorities last weekend also shuttering Signature Bank, another crypto favorite, the government is either intentionally or indirectly using its relationship with those gatekeeping financial institutions to squeeze the industry. Crypto companies that previously banked with one or more of three shuttered institutions have been rejected repeatedly by bank compliance officers as they desperately try to open alternative accounts.

Although the New York Department of Financial Services said Signature’s closure had nothing to do with crypto and was instead triggered by a “crisis of confidence” in its leadership, people are scratching their heads over why a supposedly solvent bank was shut down. Former U.S. Rep. Barney Frank, now a board member at Signature, speculated in a New York Magazine interview that the New York financial regulator had made the bank “a poster child to say 'stay away from crypto.’” Later, Reuters reported the FDIC is insisting that any prospective buyer will have to give up on Signature’s crypto business. (The regulator later denied that report.)

Blacklisting a legal industry in this way is an abuse of power. But if that is what the NYDFS was doing – presumably in coordination with federal agencies – for now there’s little crypto leaders can do about it.

Meanwhile, stablecoins, which are vital to fiat-to-crypto exchange operations, have been caught up in this. When Circle Financial announced that some of the reserves backing USDC were held at Silicon Valley Bank, the stablecoin briefly lost its one-to-one peg to the dollar. That situation has been resolved, but the closure of Signature Bank has meant Circle can no longer use its 24/7 Signet dollar-clearing system for redemptions, forcing it to rely solely on the time-bound services of Wall Street behemoth BNY Mellon.

Power struggle

Still, as angel investor and Myth of Money newsletter author Tatiana Koffman wrote in a CoinDesk OpEd, “Bitcoin is made for this moment.” If people continue to lose confidence in banks’ ability to keep their money safe, the narrative around Bitcoin’s self-custody model will only get stronger. Its appeal will be further enhanced if the Fed is forced to reverse course and cut interest rates, which could weaken the dollar. (That prospect grew stronger Thursday with news of an unexpected softening in U.S. inflation.)

I see this all playing out in a complicated, multifaceted clash of power, one that ultimately compels governments to accelerate the implementation of new regulatory framework for the coming era of digital money.

On one level, the bank failures underscore the need to divorce payments from crisis-prone fractional reserve banking – precisely the solution for which fully reserved stablecoins are designed.

Given the USDC stablecoin’s hiccups this past week, the argument will grow for requiring stablecoin issuers to hold banking licenses with access to the Fed’s discount window, rather than storing their reserves at third-party traditional banks. This is what Wyoming-based Custodia Bank applied to do, only to be rejected by the Fed last month, in what now seems an especially bone-headed response. Circle, too, has long expressed a goal to become a bank.

If this model is endorsed, how will the traditional banks respond? They’re not going to want these new crypto players poaching their depositors, a super-cheap source of financing whose departure could provoke an even bigger banking crisis.

Might governments revert to direct control via a central bank digital currency (CBDC)? With CBDCs it’s believed that central banks can apply targeted differentiated interest rates – including negative interest rates – to incentivize people to continue storing their savings with higher-paying traditional banks.

Complicating things for governments, those same people could just exit their national currency altogether and put their savings in cryptocurrencies like bitcoin. As the struggle to control the digitization of fiat money progresses, the OG digital currency will stand as a hard-money alternative.

Does that mean bitcoin becomes a real competitor to sovereign currencies for payments? Not necessarily. While it’s possible that developing nations facing monetary outflows amid this uncertainty will follow El Salvador’s lead and declare bitcoin legal tender, the use of existing national currencies will likely remain entrenched in larger economies. (Technologically, Bitcoin still has to prove itself as a payment mechanism.)

Still, Bitcoin’s mere presence as a competitor could pressure governments to change things up, especially as different economies – such as China’s – seize a competitive advantage in monetary digitization.

The countervailing force in all this is the public perception of crypto technology, which right now is deep in negative territory following the blowups of last year. Those events left millions of retail investors with losses and stoked the impression of a community dominated by scammers and selfish “bros” obsessed with gaudy trappings of wealth.

At its core, money is a confidence game, a matter of faith and trust among the population that uses it. It’s likely confidence in governments and their banking partners will wane in the aftermath of this banking crisis. But crypto is, for now, dealing with an even bigger mistrust problem.

As this battle to redefine money unfolds, it’s incumbent on members of the crypto community to engage in behavior that breeds confidence. If they can achieve that, the future is theirs.


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Michael J. Casey

Michael J. Casey is CoinDesk's Chief Content Officer.