It’s 10 pm, Do You Know Where Your Bank Deposits Are?
This short and timely blog was authored while instability in the U.S. financial system and markets were unfolding. Unless you’ve been living on a remote island with no Internet access, you surely are aware of the collapse and subsequent FDIC/Government take-over of 3 very large and important US-based regional banks.
Meanwhile, international banks are also experiencing similar issues. Will there be more contagion?
The point of this piece is to highlight fundamental differences between the existing banking system and the emerging crypto/blockchain ecosystem. Here are some key differences:
The Collapse of Major US Regional Banks
The key issue in the demise of the aforementioned 3 regional banks was mismanagement of bank and deposit assets by the bank executives. Whether this turns out to be true or not isn’t the real point, however. The real point is that all banks are based on the fractional reserve system set up by The Federal Reserve Act of 1913.
Fractional Reserve Banking Explained
“Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal.”
In addition, customers who deposit funds in a bank no longer actually control those funds, nor do they have immediate access to withdraw them in times of urgent need. While the FDIC insures up to $250K of each customer's bank deposits, in times of peril as experienced this week, those deposits may not be immediately available.
The banking system today relies on “trust” - bank customers must trust the bank to ensure the safety of their deposits.
No such peril or risk exists with crypto-based self-custody solutions. The cryptocurrency that is stored in self-custody wallets is immediately available and accessible. As an example, the Bitcoin blockchain is the most powerful global network based on compute hashrate, and has an uptime of 99.99% (since the invention of the protocol in 2009). The security of the network is directly related to the fully-global decentralization of this compute hashpower. Transaction blocks have been written to the blockchain every 10 minutes, without fail, since 2009. If faster transactions are required for a specific use case, solutions like the Lightning Network are available that run on top of the Bitcoin blockchain for near real-time execution.
In addition to access and speed, crypto funds deposited in a self-custody wallet are segregated, safe, and not available to anyone except the owner of that wallet. The owner is the person who owns the private key to the wallet. Additional information can be found here.
Global awareness around the concept of “self-custody” is growing. The instability in the banking system, and the risks that are inherent in a fractional reserve banking system, are becoming clearer.
Even if you do know where your bank deposits are at 10 pm, can you access and withdraw all your funds in times of urgent need? As we say in crypto circles: “Don’t trust, verify.”
For additional information on why this matters, please visit our previous blog: Why On-Chain Matters.
