TradFi failing is NOT a crypto problem. Blockchain fixes this.
Legacy media quickly reverted to tired and misguided accusations that all of crypto is a scam following the collapse of FTX, Voyager, Celsius, and BlockFi last year. Yet, none of the issues these failed companies faced were caused by blockchain. Instead, criminal activity, greed, poor risk management, novice business processes, hubris, and malicious acts were to blame – all of which occurred off-chain.
I mean, the ‘Bitcoin is dead’ mantra even came back, with widespread media declaring the top cryptocurrency ‘dead’ 27 times in 2022. Interestingly, this was down roughly 50% from the year before.
It’s not a crypto thing – it’s an IRL thing.
Now, two TradFi banks are insolvent to the point of collapse – Silvergate and Silicon Valley Bank – and the contagion to the crypto industry is being felt most in the depeg of Circle’s USDC, which has billions of dollars deposited in Silicon Valley Bank.
Again, none of the factors negatively affecting the crypto industry right now are due to on-chain failures. Instead, these are issues of the legacy financial industry, and they are only impacting crypto due to governmental resistance to adopting distributed ledger technology such as blockchain.
In fact, the TradFi and legacy financial markets have hit the crypto industry harder in the past two years than any other sector. Blockchain fixes many problems, but one, in particular, was clear to see during the collapse of FTX as off-chain centralized exchanges were negatively effecting while DeFi loans connected to the contagion operated as intended, and liquidations occurred without impacting the underlying DeFi protocols themselves. DeFi worked where TradFi failed.
The same thing is happening again. Every time there has been a bank run on Tether, it has survived and redeemed tens of billions of dollars over the last 12 months while operating without fault. Likewise, the blockchain record of USDT’s supply has proven itself time and time again, even with countless investors doubting Tether’s reserves.
However, Circle’s USDC may suffer a different fate as its reserves, which were held in a traditional bank, are now unavailable to them. As a result, their USDC on-chain tokens continue to perform correctly, but the underlying assets in the physical world are inaccessible.
This is not a failure of crypto.
This is not a failure of blockchain.
This is a failure of the traditional banking system.
Satoshi invented Bitcoin following the 2008 global financial crisis, and while he may have been working on the project before, the events clearly spurred his motivations. For example, in a 2009 post, he wrote:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
While we’re all at ETHDenver talking about the potential of zk-proofs, worrying about the issues of bridges, and looking to improve account abstraction, TradFi is falling for the same rudimentary mistakes again and again. We’re concerned that our global interconnected distributed ledger network of Turing complete systems could be better. Meanwhile, banks running ATMs on Windows XP exploit fractional reserve banking and high-risk investments to make billions for themselves until they break apart.
Everyone said the banks were ‘too big to fail’ in 2008, and all we did was kick the can down the road with hardly any arrests for financial crimes. So while we might have Sam Bankman-Fried waiting to undergo trial, there are potentially hundreds of white-collar criminals who are still working in TradFi or TradFi-adjacent businesses to this day.
Capitalist greed and outdated financial systems are on the cusp of activating an economic crisis of a snowball that started over 15 years ago.
Blockchain fixes this
At the risk of being labeled a mere ‘crypto bro,’ blockchain fixes this. Of course, blockchain doesn’t cure all ill, but it’s damn good at solving financial issues. Why? It’s secure, proven, and immutable.
The problem? It’s secure, proven, and immutable, so it cannot be exploited. FTX would likely never have gotten to the position it did if all of its financial activity happened on-chain. SBF. Instead, he used proprietary in-house technology, with a scattering of QuickBooks, to handle his allegedly criminal needs.
Similarly, governments can not issue frivolous spending on-chain, partake in bribes, or misappropriate funds. I’m not pointing fingers at any government in particular, yet it’s naive in 2023 to assume all governments operate at 100% efficiency and 100% honesty at all times. A well-designed blockchain does this, and through integrating zero-knowledge technology, privacy can even be maintained for private transactions but in a trustless environment.
Not the time for fear
The crypto fear and greed index dropped back into the ‘fear’ category following the Silvergate liquidation announcement, and it will likely decline further following this weekend’s USDC events. However, I do not believe this is a time to be scared of the crypto industry. The infrastructure being built outclasses the legacy financial industry on every level, and the utility of on-chain transactions surpasses anything cash can do.
This is not a time to be fearful for crypto. This is a time to be afraid for FIAT.
So often, I hear people talk about the ‘use case’ for crypto, and if the situation fits, I will explain the countless applications of blockchain technology across numerous industries. However, the most important use case is replacing our current outdated pseudo-digital financial system.
My heart goes out to anyone who loses savings throughout this banking crisis – if that is where we are headed – but it is just another reminder that the current system is broken, and is time for a change.
A new financial system
It will not happen overnight but do not give up on a technology that can help build a better, fairer, more inclusive world.
I entered the world of cryptocurrency to use the privileges granted to me by my loving family in the UK, private schooling, and attendance at a top UK university to make a real difference. For the most part, the current financial system worked for me – but I was in the minority. I firmly believe in the potential of blockchain technology and do not have faith in the traditional banking system.
Writing this, I laugh that some may believe I’m stuck in the ‘cult’ of crypto, that I’ve become indoctrinated into a web of meme coins and Ponzi schemes. Yet, that’s the irony.
Crypto has no leader; it has no centralized leadership, requirement for loyalty, demands, or shyness from criticism. Crypto does have firmly held beliefs though – decentralization, financial freedom, self-custody, security, and transparency. However, if you think you must be in a cult to hold those beliefs, you’re probably in a cult yourself.
In fact, I wholly accept that the entire crypto industry is essentially in beta right now – and in my view – it’s the most exciting beta of all time. Screw ChatGPT; I’ll take an interconnected EVM/IBC landscape backed by the strength and security of Bitcoin any day.