Two American banks collapsed this month in rapid succession. One is a crypto-focused bank, while the other is a traditional bank. One bank required a bailout. One did not. You might be forgiven for thinking that the crypto-focused bank was the one that required a bailout from the Federal Deposit Insurance Corporation (FDIC).
The tides of financial banking have shifted at breakneck speed. Crypto has long been accused of being a risky and volatile investment asset. However, there has been a change in the course of events. At the moment, the collapse of a centralized bank has taken crypto with it.
The rise of DeFi and the crash of CeFi
Two high-profile bank closures are causing havoc in the cryptocurrency market, with leading tokens bitcoin and ether down nearly 10% for the week each as fears of an industry liquidity shortage grow.
Silvergate, a traditional bank founded in 1987, lent out the majority of its funds to crypto exchanges, and the collapse of $32 billion FTX, run by Sam Bankman-Fried (SBF), exacerbated the situation.
Elizabeth Warren, a senator from the United States, stated in a tweet that the failure of Silvergate Bank, the preferred crypto bank, is disappointing but predictable. This bank’s failure has ushered in the end of fiat currency and a great deal more.
Crypto advocates stated that centralized banks were to blame. Their conception of an alternative financial system untethered to large banks and other gatekeepers was superior. They argued that the recent crackdown by government regulators on crypto firms had sown the seeds of the bank’s demise.
And the pointing of the finger occurred in both directions. Some tech investors argued that the crypto world’s string of bad actors and overnight collapses had conditioned people to panic at the first sign of trouble, paving the way for the Silicon Valley Bank crisis.
The blame game is an indication of factionalism in the technology industry, where hot startups and trends come and go and crises can be used to advance agendas. As Silicon Valley Bank collapsed, crypto advocates blamed the traditional financial system’s structures for sowing instability.
As is typical during bank runs, these worries became self-fulfilling prophecies. The Federal Deposit Insurance Corporation announced that it would assume control of Silicon Valley Bank, the largest bank failure since the 2008 financial crisis. Companies in the technology sector with cash in the bank scrambled to pay employees and suppliers.
As the crisis intensified, however, crypto advocates viewed the failure of Silicon Valley Bank as an opportunity to advance arguments they have been making since the 2008 financial crisis. According to them, this upheaval showed that financial systems were too centralized, which inspired the development of Bitcoin.
Some crypto players like Elon Musk and Changpeng Zhao have begun to take actual steps that can benefit the crypto community, such as digital banks.
Banks sink – how can crypto help?
With the downfall of traditional banks, crypto players have begun to consider the concept of digital banks. According to Bloomberg, CZ Zhao, the CEO of the exchange Binance, wants to spend $1 billion on a large deal to buy a bank.
The goal would be to make Binance a bridge between traditional and crypto finance, as well as to facilitate user exchanges. This is what CZ said at the Web Summit event, which is currently taking place in Lisbon. Bloomberg reported, citing what the Binance CEO said during his speech:
There are people who hold certain types of local licenses, traditional banking, payment-service providers, even banks. We’re looking at those things.
CZ, CEO Binance
Zhao also stated that investing in banks is a smart strategy for Binance because when the crypto exchange collaborates with a bank, Binance frequently drives a large number of new users to the bank, increasing the bank’s valuation. After the collapse of the SBV, CZ revised his thought about buying a bank.
CZ also points out that banks are the problem.
Elon Musk considers buying SBV
Elon Musk says he’s open to Twitter buying Silicon Valley Bank, which failed unexpectedly on Friday, leaving many worried about what might happen this week.
The billionaire responded to Min-Liang Tan, CEO of Razer, who sells gaming computers, who suggested that “Twitter should buy SVB and become a digital bank” on Friday night.
Musk, who co-founded PayPal, purchased Twitter for $44 billion in late October. He wants to incorporate payments into the platform, which an acquisition of SVB would presumably facilitate.
How can digital banks help the crypto industry?
Digital banks can help the crypto industry in several ways, including:
1. Offering crypto-friendly services: Digital banks can provide customers with easy access to crypto trading and investing platforms. By partnering with established crypto exchanges, digital banks can help customers buy and sell cryptocurrencies through their banking app or website.
2. Providing a secure platform for transactions: Cryptocurrencies can be vulnerable to security risks such as hacking and theft. Digital banks can offer customers a secure platform for storing and transacting cryptocurrencies, using advanced security measures like two-factor authentication and biometric verification.
3. Enabling instant settlement: Digital banks can enable instant settlement of crypto transactions, which can help reduce the risk of fraud and increase the speed and efficiency of transactions.
4. Facilitating cross-border payments: Digital banks can help facilitate cross-border payments using crypto, which can be faster and cheaper than traditional methods like wire transfers. This can help promote the adoption of crypto as a global means of exchange.
Overall, digital banks can play an important role in helping to promote the adoption and mainstream use of cryptocurrencies, by providing customers with secure, convenient, and accessible ways to buy, sell, and transact with digital assets.
