GM DOers!
This was a terrible weekend for many.
Silicon Valley Bank (SVB) went belly up, impacting thousands of tech start ups and 100,000s of employees. 😳
As a result, $USDC broke its peg and fell to < $0.90 for the first time, putting the DeFi and crypto ecosystem on edge. (more on this below in case you’re concerned)
And who knows what disaster might happen next…
There is a lot to unpack here, but that last thought is exactly the problem. “Who knows?”
The legacy financial system is opaque and requires trust. No one should ever have to trust something which they also can’t see. It makes no logical sense.
Yet the entire world's financial system is built in such a way. 🙄
Anyway, I’m not going to talk much about banking here, I just want to make a point about the direction our world is heading…
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The Cause of The SVB Bank Run
The cause of this weekend's events was NOT a solvency crisis like you’ve likely heard on Twitter or in other newsletters.
SVB had all the assets to pay back customers (over time). This isn’t an “FTX-like” situation where there was no money.
The problem was a liquidity crisis. Meaning, SVB couldn't convert its assets (loans, securities, etc.) into cash fast enough to suffice the amount of withdrawals from its customers.
Basically every bank in the US works like this.
So if SVB had all the assets, why was there a bank run in the first place?
The answer is instant communication + instant liquidity.
Or, in other words, Social Media + Banking Apps.
Jim Bianco gives a great detailed thread on this here:
Lots of really bad takes about SVB. Let’s try and correct This is not a solvency crisis like 2008. Bad loans or poor investments were not made. Money was not lost. So, everyone is going to get their money back. (And please no takes about no interest rate hedging.… twitter.com/i/web/status/1…
— Jim Bianco (@biancoresearch)11:52 AM • Mar 12, 2023
In short, some high profile individuals like Peter Thiel began tweeting and telling founders to pull their funds from SVB out of concern for the amount of available assets SVB had (social media).
Which was the smart and reasonable thing to do, by the way, as we should warn each other when trouble is brewing.
Since millions could see these recommendations instantly, customers at SVB pulled out their phones, opened up bank accounts elsewhere and transferred money immediately (instant liquidity). ⚡
This is a phenomenon that was only recently made possible through technological innovation.
Social media and fintech applications have enabled information and liquidity to move instantly.
Now, of course, it sucks that SVB couldn’t get the cash into the hands of everyone immediately. As a result, this has turned into a complete disaster for so many people and businesses.
To be fair though, this same thing could happen to many (most?) banks across the US.
One point to consider, however, is that if you’re putting your money into a bank and expect a yield on your cash (even if it's <1%), that yield has to come from somewhere.
Which means, the bank has to do something with your cash to make that yield for you 🤷♂️
This means that we should expect that some cash the bank holds will be in other assets.
Now, I’m not going to get into the rabbit hole of fractionalized banking, because that’s not the topic of conversation here, nor is that what we talk about at Web3 Academy.
Of course, I’d much rather custody my own assets rather than rely on someone else.
And again, I’m not saying that SVB was managing their assets inappropriately, I’m just saying that if a large population stages a bank run on practically any bank, the same result will happen.
So, what I want to talk about instead is how we could better prevent these sorts of scenarios from happening.
If You Want Trust, You Need Transparency (Relationships 101)
The solution to all of these problems is transparency.
It’s literally that simple.
If banks were transparent and actually offered a good service, this wouldn't have happened.
If Peter Thiel tweeted out that SVB didn't have enough cash readily available for all customers, and we could simply verify their holdings rather than scramble to move our funds out of fear, things could have gone very differently.
We could just take a deep breath, and verify.
Those who needed cash today, might have removed their funds. But those who were holding it for 6, 12 or 24 months, would’ve have been ok with leaving it there.
After all, we all already know that banks don’t have 100% of customer funds available. That’s the risk we take to store our cash and earn some yield.
As a result of no transparency, however, customers all over the US are now afraid that their bank doesn’t have any funds to cover withdrawals, which may force even more bank runs, even if it’s not actually necessary.
If we have instant communication + instant liquidity, we also need instant transparency.
This is exactly what we are preaching in web3, too. If I’m going to build on your platform, I need to be able to see what I’m building on.
I need to understand the metrics and the risks.
Whether I’m banking with you or building on your platform, I’m entering into a trusted relationship with you, and relationships require openness and transparency to thrive.
Once there is transparency, it enables everyone to take responsibility and make informed decisions. Without transparency, I must blindly rely on people and organizations I do not know.
It's wild that we’ve built a financial system and an internet that works in this way 🤦
Thankfully, blockchains act as open and transparent trust machines for the internet. The more we move on-chain, the less we need to trust and the more we can simply verify.
That is the entire purpose of Web3 Academy PRO, to 👀🔛⛓️(look on-chain). Most people don’t quite grasp this yet, but the ability to look on-chain is going to change everything.
