Silicon Valley Bank Is a Case Study of Why the Banking System Needs Change

By Kelly Ferraro Kelly Ferraro has been verified by Muck Rack's editorial team
Published on March 13, 2023

The Treasury, Fed, and FDIC have jointly announced steps to ensure deposits in Silicon Valley Bank will be paid in full, yet in the aftermath of the bank’s failure, we find ourselves at a crossroads.  It is important to examine the situation and the future of banking where traditional finance meets crypto and the blockchain.

The failure of Silicon Valley Bank shocked many, especially those in the tech industry who have long viewed the institution as a cornerstone of innovation and progress.

However, could this traditional bank failure actually have a silver lining for the long-term value of alternative monetary instruments, especially cryptocurrency?

I do believe the answer is yes; yes, it can.

So, What Happened?

While this situation is still unfolding and is now headed toward having an official backstop solution, we must examine all sides of just how this happened. It can be argued that Federal Reserve Chairman Jerome Powell and those who are running the U.S. financial systems started the proverbial storm.

The Fed began interest rate increases too late, following a long period of zero interest rates and printing money, especially on the heels of the Covid pandemic. Although not intending to do so, there is an old saying about how the Fed cools down the economy. That saying is, “they just keep raising rates until something breaks.”

When they did start the rate increases, they tried to make up for lost time by hiking rates at speeds that were bound to have this result, even with all of the soft landing hopes and finger-crossing. Well, it’s hard to argue against the fact something broke.

While rising rates can work well when done in a calculated and slow-moving fashion, they don’t work as well when done too rapidly. SVB is case in point.

On the flip side, rather than adapting to the changing landscape of financial technology, SVB continued to pour resources into outdated systems and methods, investing in Treasuries and long-term mortgage-backed securities. If the latter sounds eerily familiar, that is because it is straight out of the pre-2008 investment playbook.  Elementary banking is “managing interest rate risk.”

Community or Me First?

Another issue that SVB battled is their community not coming together. The ecosystem didn’t try to fight for the bank that has been a staple of lending to technology innovators for 40 years, but to showcase human nature at its core.

Customers, which include VCs, began withdrawing funds en masse versus coming together to back the bank and keep it standing. While we want to put the sole blame on the Fed, we do have to ask ourselves – why did we act like Mr. Potter and not George Bailey at this time?

Now Is the Time to Actually Embrace the Alternatives

Why do we continue to put trust in a system that continues to break? Once every 15 years is entirely too much to experience U.S. banks collapsing.

So, with that, why are we not embracing and investing in what cryptocurrencies and decentralization promise?

Cryptocurrency provides a strong alternative to traditional banking methods, which are slow, inefficient, and often unpredictable. With cryptocurrency, transactions are secure, quick, and require little to no third-party involvement. And while there are bad actors that have emerged, is traditional banking free of those same actors? The short answer is no.

I posit that, over time, as more people become aware and frustrated by the limitations of traditional banking, the demand for cryptocurrency is only going to increase.

Silver Linings – But It Will Take Time

When a prominent institution such as Silicon Valley Bank falters, then fails, it can cause widespread panic and lack of trust in traditional financial systems. It is why the powers that be stepped in so swiftly to stop the bleeding.

Following the 2008 financial crisis and ensuing Great Recession, is it a coincidence that the first crypto use case, the original Bitcoin white paper by Satoshi Nakamoto, emerged shortly thereafter in 2009?

Alternative solutions to what can be labeled a broken system began to emerge, and a cutting-edge industry was born. I suspect that more innovation will be born of the current outdated system’s overreliance on centralization and a framework that is both reactive and prone to human error.

What starts as a simple desire for better alternatives can drive investors towards new and emerging markets, such as cryptocurrency. It is time to take a hard look at what this non-fiat currency affords us as both individuals and businesses.

But, Is Crypto Safe (Asking for a Friend, Says the Fed)

On the periphery of these banking issues, there continues to be scrutiny placed on the crypto markets, which have been in a cold, dark winter for far too long.

Powell, whose job running the Fed can and should be questioned, recently issued caution with respect to cryptocurrencies, although he does not want to “stifle innovation.” However, that is exactly what he has done and what he continues to do.

Entering the conversation is also New York Attorney General Letitia James, who recently cited that ETH (the native token of the Ethereum blockchain) is a security and has moved forward with a lawsuit against exchange KuCoin for selling unregistered securities.

This, too, leaves cryptocurrencies vulnerable to traditional market regulations.

Is the Fed Ever Going to Get the Future–or Will It be Too Late?

Since 2008, as we outlined above, we are effectively in a new post-fiat money world. We have to ask ourselves, do the Fed and the regulators understand what to do with technology and cryptocurrencies, or are their policies enabling failures?

The Fed OG’s, including its illustrious founder, Alexander Hamilton, unequivocally knew the future of paper money – which was the cutting-edge financial instrument of its time.  Hamilton and his colleagues understood well that paper money had a utility and a purpose that was outside of gold and silver.

Remember this: paper money once had the same battle to fight that cryptocurrencies are fighting today. When the future is coming, it cannot be held back.

Regulate, but be Bold

We are at a time that is causing a great divide. We are at a place where the establishment and the policies being implemented are not working for the future of money.

And now, here we are with a system that effectively broke a high-functioning bank. If we can’t regulate fiat properly, how are we going to move to regulate crypto?

So, my thoughts are – if you want to regulate, be bold. Be like the founders of the Fed. Be like Alexander Hamilton. 

Don’t waffle for years and make decisions that cause the system to actually break. Let the people reap the benefits that come from once-in-a-lifetime innovation.

Crypto, such as BTC and ETH, are like paper money at its inception; they are used and exchanged for value. Yes, it is done digitally so that digital transactions can happen. This is actually a democratization, and it is happening in real time. And yes, regulations are necessary. But should we attach a new (and what could be a better) way of banking to a system that has so many gaps?

We Need Believers with Deep Understanding

Banks like SVB have banked many crypto founders, giving them the capital to fund their ideas. This is where the world is going. These issues are tied together. The failures of a bank that funds the most creative and bold ideas near shuttering is a scary thought.

The time has come for fearless leaders, not just sitting in the Oval Office, but those that are appointed. We don’t need to recycle politicians across the board to satisfy political egos and the broken status quo.

There are solutions to make things better utilizing sensible and workable regulations. They are needed NOW. It is time for decentralization. The very innovation the U.S. fears embracing is what can save the current broken system from itself.

Let’s Find the Opportunities and Look Forward

The SVB situation can be looked at as an opportunity for cryptocurrency to gain more mainstream acceptance.

With traditional banks struggling, as they have been for some time, there are people willing to adopt an alternative financial system that is more secure and transparent. What we need to get right is the regulations around cryptocurrency – and we need the right people to design those regs.

I do believe that as more people begin to see the benefits of cryptocurrency, its value will only continue to rise.

In conclusion, while SVB’s near-total failure could have been a massive setback for traditional banking, as well as the VC and tech ecosystem, it could be, over the long term, an opportunity for the masses to see the value of cryptocurrency.

As demand for more secure and efficient financial systems grows, cryptocurrency has the potential to become a mainstream alternative that can truly rival traditional banking methods.

By Kelly Ferraro Kelly Ferraro has been verified by Muck Rack's editorial team

Kelly Ferraro is an events columnist at Grit Daily. She is the co-founder, CEO & President of River North Communications, touting two decades of experience as a corporate communications and TradFi professional. Having previously worked at Bank of America and Guggenheim Securities, she is well-equipped to design and implement media campaigns that align with business objectives. Kelly began her career at a hedge fund, developing a love for numbers as they told a company’s true story. She is also passionate about the blockchain evolution and believes transparency is the key to widespread adoption.

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