🪙 Fractional re-swerves?
🥊 Traditional Banks vs Crypto Exchanges
💀 We must survive
🦹 Villains in suits
Well done USA 🇺🇸 protecting all depositors of SVB. The U.S. banking system remains resilient and on a solid foundation...
The last few days have been terrifying and confusing for everyone from economists to businesses and investors, which considering what has happened in the financial world, is completely understandable.
Major banks don't just simply collapse, right?
Major banks in US collapsed, including SVB and Silvergate
This is the first major bank collapse since the 2008 crisis
Stocks and financial markets have been hit as a result
Businesses have been heavily impacted
Anyone holding assets in the impacted banks is at risk of losing them
However, trust and understanding are important parts of the life ecosystem and this scenario is no different, so today we are going to deep dive into some VITAL areas to help understand why these banking problems may have occurred and how this differs from the crypto world.
Let's get started with Fractional Reserves...
🪙 Fractional re-swerves?
If you're like most people, you probably don't think too much about how banks work. You deposit money, you withdraw money, and everything seems to work just fine.
But behind the scenes, there's a magical process happening that keeps the banking system running smoothly (or perhaps not so smoothly currently), the almighty fractional reserves 🙃
So, what are fractional reserves, you ask?
Well, it's like this: when you deposit money into a bank, the bank doesn't just take your money and put it in a vault, and yes we know, the movies are a lie. Instead, they keep a portion of it on reserve – usually around 10% – and lend out the rest to other customers. This means that for every dollar you deposit, the bank can lend out nine more dollars to other people. It's like the bank is creating money out of thin air!
Now, I know what you're thinking. "Wait a minute, that doesn't sound very safe. What happens if everyone tries to withdraw their money at once?" It's a good question, and one that has kept bankers up at night for centuries. But the truth is, as long as not everyone tries to withdraw their money at once, the system works just fine. It's like a game of musical chairs – as long as there are enough chairs (i.e. reserves) to go around, everyone is happy.
So, why do banks do this?
Well, it's simple – they make money off of the interest they charge on loans. By lending out more money than they actually have in reserves, they can make more loans and earn more interest. It's like a big game of Monopoly, where the bank gets to collect rent on all the properties (with hotels!) they own, except they are using your hard earned money.
Of course, there are risks involved. If too many people try to withdraw their money at once, the bank might not have enough reserves to cover all the withdrawals. This is what happened during the Great Depression when banks failed left and right and people lost their life savings. But these days, the government has measures in place to prevent such disasters from happening again. So you can rest easy knowing that your money is safe (for the most part).
However, it appears some administration rollbacks on previous rules may have impacted this chaotic situation:
So if our money is safe, what is the problem?
For an ordinary user with typically less than $250k in the bank, this is not an issue, only the slight inconvenience of having to find a new bank. The reason for this is because banks insure users assets up to this amount in most cases, which is where the fractional reserves in theory are not so bad, right?
However, this still isn't the case as even though your money (if within the threshold) is insured, the bank simply does not have the reserves to pay out every customer of the bank if they all withdrew at once, this simply protects the customers in case a collapse or problem occurs and unfortunately fractional reserves take their toll when an issue occurs, like we are currently seeing.
In conclusion, fractional reserves are like the secret sauce of banking – they make everything work smoothly, but you don't really notice them unless something goes wrong. So, the next time you deposit money into your bank account, remember that you're contributing to the magical world of fractional reserves. And who knows, maybe one day you'll even be the one borrowing money from the bank and contributing to the system yourself!
🥊 Traditional Banks vs Crypto Exchanges
When it comes to financial services, traditional banks and crypto exchanges have some similarities, but also significant differences.
One of the biggest differences is their regulatory frameworks. Banks are subject to strict regulations imposed by national and international financial institutions, while crypto exchanges operate in a more decentralized and loosely regulated environment as I'm sure you've noticed, things can get chaotic.
Another key difference is the currency they deal with. Banks work exclusively with fiat currencies, while crypto exchanges specialize in digital currencies like Bitcoin and Ethereum. Banks offer a range of services, including deposits, loans, and transfers, while crypto exchanges focus on trading digital currencies.
In terms of business hours, banks typically operate during regular business hours, while crypto exchanges are open 24/7. Now while this may seem small, the impact this has is still significant, as banks are not always available, which means if problems occur, you could suffer depending on availability. Whereas with crypt operating 24/7, the cycle is constant and everything is done in real time as a result. No more waiting 3 days for an answer, or a transfer.
Custody services are also different, with banks offering custody for fiat currencies and other assets, and crypto exchanges offering custody for digital currencies. Both traditional banks and crypto exchanges charge fees for their services, but the fees differ depending on the service.
When talking about concerns, security is always there. With crypto, the nature of the technology makes crypto exchanges vulnerable to hacking and other security threats as we sadly see on a regular basis and that will not change until regulation comes into play, whereas banks are seen as ‘naturally’ safe option considering they are the financial hub and THE place for most people to store assets, if they were not safe, they would quite simply not be as popular as they are, right?
There are attempts however to make crypto as trustworthy as possible with the most prominent being proof of reserves, which is where crypto exchanges prove they have the reserves to back user assets, unlike what we see above with fractional reserves with banks.
As the world becomes more digitized, it will be interesting to see how traditional banks and crypto exchanges evolve and adapt to meet the changing needs of consumers. While they have different business models and regulatory frameworks, they both play important roles in the financial ecosystem, offering consumers a range of options for managing their finances.
💀 Survival is a must
So, now that you've taken in all that information, you'll be pleased to know you can rest your eyes very shortly, but first let's summarise and figure out what this means for you.
With Silicon Valley Bank and Silvergate Bank being in a diabolical situation as well as Signature Bank being closed by the US Treasury, are we likely to see other banks collapse and cause more pain? Well, with fractional reserves there is a chance this could continue yes, although that doesn't mean anymore will collapse.
The government are also stepping in to take control of matters before more economical damage is done, which is fair to say is a good thing. However, that doesn't mean there isn't anymore pain to come from this.
As you can see below, there could be more trouble to come 🥴
Fractional reserves and debt control seem to be underlying issues with banks and until these are controlled then there is always a risk.
We also saw a steep drop on stocks and cryptocurrencies over the past few days, which sparked more fear, especially with the USDCUSDC depeg which had a significant impact.
To conclude, fractional reserves are playing the star role in bank financial issues, and if this is not resolved in the near future, we could see further pain which would impact economies even harder, and with US government economic announcements happening over the next 9 days, these could be deciding factors on how the short term future is going to play out.
Protect yourself before you wreck yourself.