For many within the digital asset sector, the US banking failures in the first quarter of 2023 were likely seen as a boon to the fundamental ethos behind Bitcoin. They proved that the banking system is fallible, just as was posited by Satoshi Nakamoto when he mined the first Bitcoin block and attached a headline from the 2008 mortgage crisis.
Perhaps you’d expect that the failures, combined with the non-stop USD printing that has occurred over the past few years, and the need to raise the debt ceiling, would cause more people to start considering assets like Bitcoin to be worthwhile. Instead, it seems the US regulatory bodies are more focused on pushing crypto out of their system altogether.
Even if you’re not convinced about crypto, you should be questioning the financial system you’re in, especially if it’s the US one. What’s interesting is that while the US seems to be trying to push it outside their borders, places like Hong Kong are starting to embrace it after years of banning it. It seems odd that one economy would push crypto out and another would embrace it. But, the reality is that the US can’t afford to lose control over a financial system which benefits them over every other nation, and so they’ll fight to hold on. Let’s recap the banking failures before dissecting some of the regulatory issues at play.
Recapping Banking Failures
Silicon Valley Bank, the 20th largest bank in the US, collapsed in early March along with a few other smaller sized banks in the US including First Republic Bank. Withdrawals were suspended, and FDIC insurance failed to cover any depositor with over $250k USD, as that is the limit of coverage for FDIC insurance. In a similar vein to what happened during the mortgage crisis of 2008 that spurred the creation of Bitcoin, the banks had to be bailed out. For reference, this bailout was actually more dollars than the one in 2008.
This really should have created a huge case for crypto. Many people began to wonder whether they could trust banks with their money seeing as it may not be there when you need it. During a bank run in the US it seems unlikely that they’d be able to keep up with withdrawals. While crypto systems such as Terra collapsed because of a bank run, this was because the system had no central authority to stop it. The reality is that if there’s a bank run on US banks, most of them won’t be able to survive either. But, rather than the US starting to take digital assets seriously, they’re instead trying to blame them and push them away.
US Pushing Out Crypto Industry?
Though it may seem like these events create a case for crypto, the US doesn’t seem to see it that way. They’ve already recently proposed their Digital Assets Mining Energy (DAME) tax, which will cause any crypto mining firm in the US to pay a 30% tax on any energy expenditures. This will likely cause, at a minimum, the smaller scale mining companies to find new places to set up shop if passed, as they won’t be able to afford the tax.
Now, as of June 6th, the SEC has sued both Binance and Coinbase exchanges for violating US security laws. It’s worth noting that only Binance’s US arm can be sued by the SEC, which is a very small part of Binance’s business. Changpeng Zhao, the CEO of Binance tweeted that perhaps if the SEC is having to fight with everyone, they’re the ones in the wrong.
It has already been shown that Gensler is having to even fight with members of congress because he’s unwilling to define whether Ethereum is a security or not. It seems mostly that Gary Gensler just acts and doesn’t actually think about those actions and their overarching implications.
The suit against Binance was filed on the 5th, with the suit against Coinbase coming just one day later. The SEC is suing Coinbase because of their staking program, which they already received fines from Kraken for. However, in March 2023, Coinbase had already submitted a petition to the SEC to explain how their staking services cannot be considered securities. Of course, the petition hasn’t been addressed, and the SEC instead continues to use enforcement only rather than actually creating regulatory clarity.
Crypto Outside US
What’s perhaps the most interesting aspect of the idea that US banking failures create a case for crypto, is that countries outside the US seem to agree. Hong Kong has begun embracing crypto again, which would seem odd when they banned it before. Do they see something the US doesn’t?
Maybe it’s just because the US is shunning crypto that Hong Kong is adopting it, they see opportunity in the US’ close-mindedness. But maybe, just maybe, they see weakness within the US economy, one that could cause the USD to fall out of favor as the reserve currency for the globe. While this would likely be a painful transition, the reality is that the US is really the biggest beneficiary from the current system, and no other nation actually wants to be beholden to the US’ control.
It could create a more fair global financial system if the USD is exposed for being as inflationary as it is, but again, this would be a painful transition. What great change to global economics hasn’t been though? The case for crypto is stronger than ever, but the desire for global financial control is a strong one as well. We’ll have to see how it all plays out.