Last week's failure of Silicon Valley Bank (SVB) raised serious problems far more significant than the obvious ones cited by the financial press and a wide range of politicians in Washington.
The main one is bank loans for questionable assets. This has not received much attention in the news or in Washington, and will soon be swept under the rug, allowing unnecessarily risky banking operations to continue.
Before last week's collapse, SVB was making loans in Bitcoin and other cryptocurrencies.
The question is, why are any banks allowed to accept cryptocurrencies as collateral for loans?
Bitcoin and its imitators are not money. They are not currency. Although rarely used for buying or selling, the Bitcoin system is designed to process only 7 transactions per second, compared to thousands of transactions per second for credit cards. When you think about it, it's not surprising.
In fact, apart from laundering drug trafficking proceeds and hiding assets from creditors, estranged spouses, and tax authorities, cryptocurrencies are of no use.
high tech pyramid scheme
Cryptocurrencies and their cousins, non-fungible tokens or NFTs, are nothing more than high-tech Ponzi schemes. Instead of Charlie Ponzi or Bernie Madoff personally running the scam, crypto fraud relies on decentralized computer blockchains and “mining” mathematical solutions.
The alleged inventor of Bitcoin, known under the pseudonym Satoshi Nakamoto, has not yet been identified. He or she then disappears, leaving the owner of a digital string worth only as much as the next fool or scammer will pay for this fictitious asset.
Early participants in a Ponzi scheme can reap huge profits if they cash out, while later cleaning out the gullible souls sucked in. That's what happened to SVB, the 16th largest bank in the US, which was a big player in crypto loans.
Many Bitcoin “investors” have already been wiped out as Bitcoin's “market capitalization” plummeted from about $1.3 trillion in 2021 to about $389 billion on Friday, a decline of about 70%.
Why are banking regulators allowing federally insured and regulated banks to make loans backed by magical Internet money? This is crazy policy, and even in the spring Even if it melts and evaporates in the summer, it is no different than allowing a bank to accept a bucket of ice as collateral in the winter.
Silicon Valley Bank is just one of many federally insured financial institutions that accept cryptocurrencies as collateral for loans. Some banks will loan you 90% of the apparent value of your cryptocurrency, but 50% loan-to-value is more common, and this appears to be the norm at SVB, according to its webpage.
Zero interest virtual currency loan
Financial news outlets of all kinds offer advice on borrowing against cryptocurrencies. These include NerdWallet and the increasingly naive and unreliable Forbes. Those who own virtual currency can also borrow it at zero interest. Gazook!
If you want a sober look at the huge risks of crypto loans, read this essay on Investopedia.
In the wake of the second largest bank failure in history, we should be deeply concerned about our dismal failure to regulate banks for more than 40 years. Its history contrasts with the period starting in 1935, when voters abandoned moderate and successful New Deal banking rules in favor of Reaganomics.
We headed in the wrong direction when the sensible New Deal banking regulations that had been in place since 1935 were crushed by Reaganomics, which reregulated banks to reduce regulations and increase the risk that institutions would fail. It's gone. (There is no such thing as deregulation, only new regulations. In modern parlance, this usually means regulations that favor companies, including banks, over customers, financial health, and public safety.) means)
Parliament's role
What we need now is a Congressional hearing to investigate why cryptocurrencies can serve as collateral for bank loans.
Request a ban on cryptocurrencies as loan collateral by writing to the White House via the hypertext link or calling 202-456-1111. Please call us at 202-456-1111.
Even if you don't own Bitcoin or its ever-growing list of alternatives, this story is important to you for multiple reasons.
Your money is only guaranteed up to $250,000. Amounts in excess of that amount are not guaranteed. So, for example, if you are a trustee of a nonprofit organization and have $1 million in deposits in the bank, you or the organization you lead are at risk of being wiped out in a bank failure.
The federal government is fully covering the deposits of SVB and New York's Signature Bank, which collapsed on Sunday. But that doesn't mean it will always be that way. During the previous banking crisis, a non-profit organization that was essentially guaranteed more than $100,000 at the time lost deposits in excess of that amount, which received little publicity at the time.
If people want to buy cryptocurrencies, they should be able to do so freely. However, these digital tokens should not be allowed to be used as collateral for loans, putting our bank deposits and investments at risk. After all, it's your and my bank deposits that banks use to make loans, as well as the deposits of businesses, nonprofits, and governments, so I don't want them to block any kind of cryptocurrency as collateral. It's not that we don't have a deep interest in it. For loans.
