Crypto folks have got a bad name for themselves; let’s put aside the scams, the ‘pump and dump’ mentality propagated by an opportunity to ‘get rich quick’, the FTX, Luna, Celsius, 3AC implosions and whatever else is to come… All of that aside, up until now in my experience, many people in crypto have wanted to stand for a utopian ideology of egalitarian financial freedom, extolling anti capitalism (or at least anti centralisation), anti bank (the most listened to podcast in crypto is called ‘Bankless’) rhetoric, which has supported this ‘us vs them’ mentality; people generally want to belong, so we create in groups and out groups for our mental well being and social safety and then we create stereotypes. As such, people in crypto have been motivated to create unnecessary antagonisms between the rich, centralised, capitalist, regulated, government-supported status quo and the geeks in shining armour riding the waves of technological advancement to save the world on their mother (surf) boards.
I don’t think this is helpful and and, quite frankly, I think the industry needs to grow up a bit. I’ve been to too many conferences now where people are justifying their crypto/blockchain project by virtue signalling and talking negatively about what other people/industries are doing. It’s not cool. Mostly because many of the projects don’t do anything and the token that the project owner has created does (and is worth) even less.
This is what crypto has become; it’s how the press and the people not in the industry view it, and I totally get it.
I take this position because I refuse to be swept along by the tides of sentiment in either direction, and would prefer to maintain an independent, impartial, practical and objective perspective on what’s going on. So I’m critical of the bad parts of the industry that I’m in because I prefer to keep my eyes open and stay focused on the one thing that I care about: are we making things objectively better for the majority of people? And if we’re not, can we develop technological solutions that can achieve that end?
That’s not virtue signalling and it’s not me trying to take a morale high ground to justify what’s to come in this piece. I don’t think it’s contentious to suggest that the role of humanity is to use our expertise and skills to try to improve things just a little bit day by day for the majority of people. It’s just the right thing to do.
So with that in mind, I ask that you too take an independent, impartial, practical and objective perspective on what’s going on in the financial system, and to evaluate for yourself if we’re making progress in the right direction for the majority of people. I’m not trying to create a right as an antithesis from highlighting a wrong. As you’ve read, I’m happy to highlight the wrongs of crypto, but we need to have a level playing field of cynicism.
I won’t go into the detail of what happened at Silicon Valley Bank, and how it came to collapse. Bottom line is that the assets that they didn’t think were that risky lost a LOT of value when rates were hiked by the Fed; this ended up with SVB having to sell some of those assets at a loss, which led to a capital raise, which totally spooked the market, people started withdrawing their money, and so the negative spiral began. That’s roughly what happened.
My main question is this - at what point did a deposit at a bank become a secured (or if greater than £85k in the UK or $250k in the US) or an unsecured, (pretty much) zero interest rate loan?!
Have you ever taken a step back and just for a second asked yourself what the point is of a bank? Imo, it’s somewhere that I can put my money safely, that I can access when I want, use to make payments for things, and where my deposit has zero risk of disappearing. If I want my money to grow through taking risk, I’ll invest in a fund or I’ll buy some equities. Or you pass your money over to a professional independent advisor and pay them a transparent fee to do that for you.
Have you ever wondered how banks end up affording massive buildings in iconic places? Yeah me too. Santander, who I bank with, made €9.6bn pre tax profit in 2022. Profit. PROFIT. Nearly 10 billy euros. That’s a lot for one company.
What are they actually doing? There are a bunch of banking services that are totally legitimate, like where they take calculated risks using their own balance sheet in order to facilitate growth, prime brokerage, market making, facilitation of FX trades, use of expertise to do mergers and acquisitions and so on. But what they are also doing is, put simply, taking customer deposits on which they pay very little interest, and using them to make investments or loans that earn them more interest.
Have a look at the SVB balance sheet at the end of 2022. In a nutshell, they had $173bn of customer deposits (in red because they owe that money to depositors), on which they were paying little interest. They were using that money to make loans to other companies where they earned more interest and investing in ‘hold to maturity securities’ which on the whole were bonds. Only $14bn was in actual cash, less than 10% of deposits.
Some comments:
This was a top 20, US regulated bank
The bank is effectively using its customer deposits as an interest free loan
I don’t quite understand why SBF goes to jail for using customer deposits for making investments and the management of SVB don’t
This set up made the bank $1.5bn net income in 2022
And then it went bust.
So the government stepped in to back all of SVBs deposits. So basically that’s saying to bankers worldwide, you can take as much risk as you like, and if shit hits the fan, we’ve got your back. Or rather, the holders of American dollars have got your back, because the Fed has to expand its balance sheet to soak up the assets at par to cover the losses. Oh and by the way, everything you’re doing has the seal of approval from the regulator.
The crazy thing about this situation is that it’s nothing new. It’s like really really old news. And if you sense a slightly irritated tone in this writing, this is why. If this came totally out of left field, like a UFO landed and sent out a electrical pulse signal that froze all the silicon in all the chips in all the computers of the country, I’d get it. But we’ve been here before!!
The savings and loan (S&L) crisis, also known as the thrift crisis, was a financial disaster that occurred in the late 1980s and early 1990s in the United States. It was primarily caused by the deregulation of the S&L industry in the 1980s and a series of risky lending practices by S&L institutions.
During the crisis, many S&L institutions made risky investments in commercial real estate, which turned out to be worth much less than they had initially thought. Many S&Ls also made bad loans to risky borrowers and engaged in fraudulent practices.
As a result of this nonsense, many S&Ls failed, and the federal government was forced to step in and bail them out. The total cost of the crisis was estimated to be around $160 billion, making it one of the largest financial disasters in U.S. history, and contributed to the recession of 1990-91.
As a part of my insistence that we look at things objectively and clearly, we have to wonder if the government institutions that supervise the financial sector actually really know what they’re doing. We assume that they do… but the S&L crisis was in part caused by deregulation…
…and what happened in 2018? The law was relaxed in the US to reduce supervision of the banks that “weren’t systemic” like SVB… as some people are saying now, they weren’t systemic in life, but they are systemic in death.
Are we totally mad for believing that regulation and the activities of huge institutions can keep up with the pace of technological advancement?
Now I’m sorry if I’m repeating myself, but I want to reiterate that I’m not banker bashing here for the benefit of crypto. I happen to believe that capitalism has done more for society than it’s taken away, my general view is that the more bankers earning lots of money paying taxes that can provide national services for people (particularly in the UK where we don’t have a ton of resources or industry) is a good thing and I do think that there are a lot of things that banks do that are valuable/good/important. But I’ve worked in a bank and I know what they’re like…
It just needs to be credit where credit is due. A decent pay for a decent days work. And taking money from people that they think is 100% secure for free, and using that to invest in other things that carry a higher interest rate just seems like a fairly basic sort of activity that doesn’t justify $1.5bn in net income in a year. I dunno maybe I’m missing something… But it doesn’t seem to me that the service that people are looking for when they use a bank as a depository is best provided by people who are seeking to make as much money as possible.
And this is my key point. There are some things in life where technology is better than humans. Technology is impartial, unemotional, objective and doesn’t need to keep up with this crazy GDP growth metric that seems to determine our success.
Our motivation for using a bank and the motivations of the people that are running the banks are at odds with one another. We just want a risk free, secure, trusted depository that we can use to manage our money and make payments. Banks want/need to take risk so that they can make as much money as possible.
The promise of blockchain is that we can use technology, rather than people, to secure our money and to make payments. The blockchain provides an indelible, permanent, transparent, cryptographically secured record of all transactions, and enables the transfer of value between two entities anywhere in the world instantly and in a trustless manner (you don’t need to ‘trust’ the other person in the transaction). Bitcoin has a limited supply so it’s not subject to inflation, and with the advent of smart contracts, we’re able to build automated mechanisms akin to the clauses of a legal contract into our value transfers that take away the risks of human vices.
I won’t start on the potential for making investments and for leveraging the ownership of real world assets, which will change the way that we think about purchasing, owning and using products that have value.
And all of this is transparent, and in your control. You actually make the choice about what happens.
At the moment, if you have some money you don’t really have any other option than to either be given it in a brief case and stuff it in your mattress, or receive it into your account and keep it in the bank. With blockchain, the third option is to receive the money into your digital wallet, hold the money either in a decentralised digital wallet, to which only you have access, or to hold it in cold storage on something like a Ledger, which looks a bit like this:
You can pop that in your safe, and so long as you can remember your safe code and your pin, you have a 100% secure depository for your cash. You can make payments to other people online securely, quickly and cheaply.
A Ledger doesn’t need to make money, because you’ve paid for it upfront. It’s not going to take risks with your money without you knowing about it. It just seems intuitively more sensible to me to have technology securing our money rather than people. You may worry that you’ll lose it or it will get stolen. Well then you can pay an insurance company a premium to take away the risk (actually you can pay other people for taking the risk by using blockchain technology, but that’s one for another post!); we pay the insurance company to provide a service as opposed to what we’re doing right now which is to not pay a bank for what we think is a service but in fact turns out to be a money making opportunity for them. The old adage is that if you’re not paying for the product, you are the product.
I think we just need to call a spade a spade. Go have a beer with someone that works in a bank… ‘What are you doing it for?’ you might ask them… I don’t think it’s going to be for love of the corporate life, or the brand loyalty or the opportunity to hang out with their boss. They want to make money. Totally fair play. I wonder what someone working in crypto would say they’re doing it for?
Let’s separate the functions … let’s have money making banks that do all sorts of funky things with financial gymnastics that make a ton of cash that we can invest in and take the risk if we want to… and let’s have blockchain technology that enables us to store and transmit our deposits in transparent ways that we can retain control of in a totally risk free way. Why are we continuing to mix the two?!