Playtime's over: It's time for the crypto industry to put on a tie

Over the last three months, four U.S. banks — SignatureSilicon ValleyFirst Republic, and Silvergate — have collapsed and declared bankruptcy.  While the Federal Reserve's interest rate hikes have played a role in these banks' failures, so has the influence of cryptocurrency companies.  From nonexistent boards and oversight to the avoidance of traditional banking and financial structures, the independent and rebellious business structure that made cryptocurrencies explode is the same thing that enables rug pulls and creates the structural weaknesses unable to withstand a bank run.  To withstand future problems and gain more respect in the economy, the cryptomarket needs to adopt traditional business practices like clear reporting, proper treatment of customer assets, and internal leadership.

Cryptocurrencies started as small markets on fringe corners of the internet.  Their disruptive and independent nature generated their initial appeal as they provided an alternative to mainstream markets for adventurous investors and those who were skeptical of traditional financial institutions.  The high value of a cryptocurrency depends entirely on its own market.  This rogue quality led to an industry that today remains decentralized and detached from government banks.

But cryptocurrencies have grown from an internet oddity into a $3-trillion industry.  The decentralization that served crypto exchanges and currencies so well in their infancy has become a liability.  Instead of being absorbed by mainstream institutions, crypto companies set out to open their own banks and investment firms — like Silvergate.  But the infrastructure was cyclical: crypto investors would deposit and take out loans from banks also engaging with crypto users.  So when the "crypto winter" came last year and an economic downturn hit the market, every single business took a hit.

For an industry so centered on freedom and individuality, the major exchanges and currencies are so interconnected that when one business fails, everyone suffers. 

Traditional business principles would mitigate this vulnerability in the industry.  Splitting up exchange, wallets, banking, and market services into different companies and diversifying their resources — perhaps with non-crypto assets — would make them more resilient to downturns.  Similarly, customer assets should be protected more with traditional insurance.  At the end of 2022, Silicon Valley Bank had 94.4% of its deposits uninsured.  At Signature, 93.3% of their deposits were uninsured as well.  So when massive losses came to their parents' companies, shares plummeted, depositors started to pull out, and in a snap, the banks imploded.

Crypto isn't American currency, so it's not protected by the FDIC.  This contributes to crypto's independence, but it also means that crypto banks don't have to meet the same reporting and accounting conditions that other banks do.  As a result, FTX didn't have the back end to manage its billion-dollar assets.  In fact, the accounting and auditing software required to run a traditional publicly traded firm was nonexistent, with basic Excel spreadsheets being pushed around in Slack.

The lack of diversified leadership makes accountability tough, too.  Thirty-seven percent of the largest crypto companies had boards that were entirely advisory or staffed by company executives.  Something as simple as diversifying who is running the company prevents the groupthink that causes problems to go unnoticed until it's too late.

Crypto is stuck between its informal roots and the mainstream economy.  Lawmakers are now looking for ways to shield the rest of the economy from the runs and collapse of crypto.  The industry should not be hampered by the decentralized spirit that formed it.  Its institutions should embrace the basic principles of good governance that led to the survival of other financial firms.

Ganon Evans is a policy analyst at Kansas Policy Institute and a contributor to Young Voices.  His research focuses on state and local tax and spending, corporate welfare, and technology.


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