Silicon Valley Bank collapse and cryptocurrencies – 03/14/2023 – Bernardo Guimarães

Silicon Valley Bank collapse and cryptocurrencies – 03/14/2023 – Bernardo Guimarães

The SVB bank broke on Friday. Shareholders lost everything, but on Sunday authorities announced guarantees for depositors and other measures to avoid problems with other banks. Interventions of this type generally have costs for the State.

What are the ideal policies in this case? One way is to improve the existing regulation. This solution requires attention to detail and will always be imperfect.

There, space is opened for radical alternatives. One of these is cryptocurrency. It was like this with the financial crisis of 2008. Bitcoin emerged in 2009, in the wave of dissatisfaction with measures to help banks.

But why could it be any different with cryptocurrencies?

Cryptocurrencies are generally based on Blockchain technology. This technology allows us to carry out transactions using digital currency without intermediaries and without the supervision of central banks.

Using this technology, people can carry out credit operations without the intermediation of financial institutions. It’s the wave of DeFi (from English for Decentralized Finance). There are apps exploring these possibilities.

But what problem does it solve?

Great institutions emerge when there are economies of scale.

Financial markets are complicated because we trade money today for the promise of money tomorrow. This exchange requires trust. Large institutions have less difficulty establishing reputations.

In addition, managing financial resources is an activity with great gains in scale. To detect possible profit opportunities it is necessary to have highly qualified people and equipment. This cost is only paid when there are large amounts to invest.

For these and other reasons, much financial intermediation is carried out by large institutions, regulated by authorities in order to avoid excessive risk taking.

Blockchain technology doesn’t change any of that.

Thus, it is not surprising that large intermediaries exist in the cryptocurrency world as well.

The path between the world of traditional finance and cryptocurrencies is usually taken through large institutions such as Voyager and Celsius, which went bankrupt last July, and FTX, which crashed at the end of the year and grabbed the headlines. .

Much of the second largest cryptocurrency, Ethereum, is effectively held by a few organizations such as Lido and Coinbase.

Today, the world’s stock of cryptocurrencies is worth about $ 1 trillion-and reached 3 trillion at the end of 2021. The total value of cryptocurrencies in the world is similar to the total value of companies listed on the São Paulo Stock Exchange, the B3.

Still, the breakdown of major institutions in this world does not have such large effects on the real economy. We don’t buy bread with Bitcoins and the credit operations that feed the productive sector are not done with cryptocurrencies, in general (at least the part that operates legally and we can observe).

As long as that’s the case, regulators won’t bail out failing institutions.

But if one day cryptocurrency is important to the real economy and a major institution fails, the central aim of the authorities will be to avoid runs and contagion. If necessary, public money will be used. At the time of crisis, there comes the intervention that can withstand the blow, and it’s no use for us to put our foot down.

It is no use for the government to promise that it will not intervene in the failure of financial institutions. It never worked in the world of traditional finance, it would not work in a world of cryptocurrencies, just as it does not work to threaten our children with punishments that we will not carry out.

Financial sector regulation is a complicated matter, but there is no easy solution.

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