Let First Republic and Credit Suisse burn

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When cryp­to mar­kets took a hit after the col­lapse of FTX and oth­er cryp­to lenders last year, some cryp­to crit­ics repeat­ed the mantra, “Let cryp­to burn.” Now, it’s big banks that are fal­ter­ing — includ­ing Cred­it Suisse and First Repub­lic — after region­al banks, includ­ing Sig­na­ture Bank and Sil­i­con Val­ley Bank, sparked a cas­cade. As a result, Moody’s has down­grad­ed the entire bank­ing sector.

If “Let cryp­to burn” was a snap­py way of say­ing that oper­at­ing out­side the finan­cial sys­tem means more per­son­al respon­si­bil­i­ty and height­ened risk, fine, cryp­to natives under­stand that con­cept. But now, we have a chance to turn a crit­i­cal lens on the tra­di­tion­al finan­cial system.

With tra­di­tion­al banks expe­ri­enc­ing finan­cial pres­sure, it’s time to let many of them fail. For­est fires can burn away old growth to make way for new trees to sprout. The same prin­ci­ples apply to banking.

Politi­cians and cryp­to crit­ics have aligned to build the nar­ra­tive that cryp­to is the risk at the heart of the cri­sis. The dirty lit­tle secret is that Trea­sury bonds were the nuclear bomb at the epi­cen­ter of this bank­ing cri­sis, and cen­tral bank inter­est rate pol­i­cy was the plane that deliv­ered the payload.

Relat­ed: Expect the SEC to use its Krak­en play­book against stak­ing protocols

These strug­gling banks loaded up on long-term trea­sury bonds dur­ing a peri­od of near-zero inter­est rates and at a time when the Unit­ed States Fed­er­al Reserve con­tin­ued to try to mol­li­fy banks that they would keep rates near zero for the fore­see­able future. 

There is an unavoid­able trade­off between low-inter­est rates and infla­tion; Fed macro­econ­o­mists know this, and yet the Fed act­ed with sur­prise as it quick­ly raised rates to catch up to the infla­tion wild­fire over the last two years. A steep rise in rates made the old long-term trea­suries — the ones pay­ing very low inter­est — sharply decrease in val­ue. When depos­i­tors demand their mon­ey back (with height­ened speed in the era of inter­net bank­ing) and all you have to sell to pay them are junk Trea­suries, you have a problem.

The Fed­er­al Reserve has giv­en Trea­sury bond hold­ings pref­er­en­tial treat­ment in its reg­u­la­tions and super­vi­so­ry approach­es (includ­ing those from which SVB was recent­ly exempt­ed). This puts blame on the Fed­er­al Reserve from two direc­tions, its sur­prise about-face on inter­est rate pol­i­cy and its reg­u­la­to­ry pol­i­cy favor­ing Trea­sury holdings.

There are many high­ly inef­fi­cient aspects of Trad­Fi, where rot­ten trees are chok­ing the growth of new sprouts. Some are a result of sim­i­lar patholo­gies where the gov­ern­ment uses the bank­ing sys­tem to sub­si­dize its own polit­i­cal objec­tives. It would be bet­ter for the econ­o­my to let them burn. 

Much of the busi­ness mod­el of tak­ing in fiat short-term, on-demand deposits, and park­ing that mon­ey in illiq­uid long-term Trea­surys (sub­si­diz­ing the gov­ern­ment) or mort­gage-backed secu­ri­ties (where the gov­ern­ment sub­si­dizes unaf­ford­able home prices) needs to burn away.

Rent-seek­ing brick-and-mor­tar facades, with most cus­tomer ser­vice out­sourced over­seas and who earn most of their rev­enue from over­draft fees, need to burn. Pay­ment sys­tems that bribe card­hold­ers with “cash back” pro­grams then use the mar­ket pow­er their con­sumer bribes give them to gouge the mer­chant, need to burn.

Relat­ed: The Fed­er­al Reserve’s pur­suit of a ‘reverse wealth effect’ is under­min­ing crypto

Some small­er and region­al banks who have failed to inno­vate, and for which the oth­er­wise unob­tain­able bank char­ter has become the mod­ern-day taxi medal­lion ensur­ing them rents from third-par­ty cus­tody of fiat deposits, need to burn away some of the over­growth as well.

Cryp­to is a rev­o­lu­tion in finance, intend­ed to replace the inter­me­di­ary-cen­tric finan­cial sys­tem with a self-sov­er­eign approach where the indi­vid­ual is able to dig­i­tal­ly cus­tody native finan­cial assets themselves.

This trans­for­ma­tion will take time. Devel­op­ers at decen­tral­ized finance (DeFi) pro­to­cols and layer‑1 blockchains live most of their lives in the fiat econ­o­my. The fed­er­al gov­ern­ment will only accept fiat dol­lars for tax pay­ments, while banks dom­i­nate real estate mortgages. 

DeFi pro­to­cols are mak­ing inroads into home mort­gages, but that’s at its ear­li­est stages. Con­sumer finance and tax pay­ments are still fiat-based. And cryp­to devel­op­ers at a min­i­mum deserve the same treat­ment as any­one else par­tic­i­pat­ing in the fiat econ­o­my. That means they shouldn’t be dis­crim­i­nat­ed against in the pro­vi­sion of basic check­ing and sav­ings accounts. 

We need some of the bank­ing sys­tem to sur­vive. But we don’t need all of it to sur­vive, and the parts that burn away open oppor­tu­ni­ties for cryp­to-native replace­ments if banks don’t unfair­ly dis­crim­i­nate against cryp­to clients.

J.W. Ver­ret is an asso­ciate pro­fes­sor at the George Mason Law School. He is a prac­tic­ing cryp­to foren­sic accoun­tant and also prac­tices secu­ri­ties law at Lawrence Law LLC. He is a mem­ber of the Finan­cial Account­ing Stan­dards Board’s Advi­so­ry Coun­cil and a for­mer mem­ber of the SEC Investor Advi­so­ry Com­mit­tee. He also leads the Cryp­to Free­dom Lab, a think tank fight­ing for pol­i­cy change to pre­serve free­dom and pri­va­cy for cryp­to devel­op­ers and users.

This arti­cle is for gen­er­al infor­ma­tion pur­pos­es and is not intend­ed to be and should not be tak­en as legal or invest­ment advice. The views, thoughts and opin­ions expressed here are the author’s alone and do not nec­es­sar­i­ly reflect or rep­re­sent the views and opin­ions of Cointelegraph.

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