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So far FDIC insurance has protected depositors, even those with millions in the bank (right or wrong, I won’t make that call). Notably, the FDIC insurance fund

by lowkey 4y ago

So far FDIC insurance has protected depositors, even those with millions in the bank (right or wrong, I won’t make that call). Notably, the FDIC insurance fund only holds $128 billion to backstop over $17 trillion in deposits. We know now, and the Fed knew since at least September, that close to 400 banks are in a similar situation to SVB (basically insolvent on a mark to market basis). What happens when more banks fail than the FDIC fund can backstop? The only question is will it be depositors, US taxpayers or all dollar holders globally left holding the bag?

ineack 4y ago
> What happens when more banks fail than the FDIC fund can backstop? I’d hope we don’t have to find out. Regardless of who holds the bag, it’ll be bad. (In an ideal world, depositors will be depositing in banks with finances matching their risk profile, but I digress.) How would crypto make this better though? Yes, self-custody eliminates the counterparty risk, but just like with USD, self-custody is just not practical for many people. Many people choose to hold their crypto in exchanges (because of convenience) or lenders (i.e., equivalent to banks, because of yields.) So doing results in similar or higher counterparty risks. If we abolished fiat and moved to BTC, a financial system will arise on top of it which will likely closely mirror the USD financial system (actually, it already does now). If that happens, the counterparty risk for depositors remains. I’m all for crypto, but I think it’s naïve to think that just because self-custody is a possibility, counterparty risk will go away. If you have a significant amount of USD, you can mitigate the risk of your bank failing on you by holding physical cash or by holding T bills. Edit to add: Also, the no counterparty risk is mostly theoretical. I’d wager that the vast majority of people that practice self-custody of their crypto are still exposed to some (but different) risk. To be safe, you need an air-gapped and trusted device holding the private keys _and_ ideally running your own node (on a different device). Do you trust your hardware? Your OS? Your wallet? If the device you transact from is compromised or is susceptible to being compromised you are exposed to risk. Hence, insurance is still needed.
- lowkey 4y ago
  I agree with everything you are saying. Self-custody isn’t as easy as leaving your money in the bank. Also, although I see the benefits of Bitcoin I don’t think it should be the only currency option. I would like us to take this opportunity to recognize that fractional reserve banking where depositor funds are used (with leverage) to make speculative bets (on mortgage backed securities or even T-bill interest rates) is a fundamentally unsound model. I would much prefer a model where I have the option to store my funds in a full-reserve bank and would happily pay for the service. As for self-custody, it is a skill like any other and one that I think more people should learn. Self-custody is fundamentally no more difficult than say building a sound backup strategy (3 copies minimum, stored in at least two formats with at least one stored offsite) There are ample tutorials on the internet and I hope more people recognize that counter-party risk is real, whether it be fiat or crypto.

by lowkey 4y ago

ineack 4y ago

> What happens when more banks fail than the FDIC fund can backstop? I’d hope we don’t have to find out. Regardless of who holds the bag, it’ll be bad. (In an ideal world, depositors will be depositing in banks with finances matching their risk profile, but I digress.) How would crypto make this better though? Yes, self-custody eliminates the counterparty risk, but just like with USD, self-custody is just not practical for many people. Many people choose to hold their crypto in exchanges (because of convenience) or lenders (i.e., equivalent to banks, because of yields.) So doing results in similar or higher counterparty risks. If we abolished fiat and moved to BTC, a financial system will arise on top of it which will likely closely mirror the USD financial system (actually, it already does now). If that happens, the counterparty risk for depositors remains. I’m all for crypto, but I think it’s naïve to think that just because self-custody is a possibility, counterparty risk will go away. If you have a significant amount of USD, you can mitigate the risk of your bank failing on you by holding physical cash or by holding T bills. Edit to add: Also, the no counterparty risk is mostly theoretical. I’d wager that the vast majority of people that practice self-custody of their crypto are still exposed to some (but different) risk. To be safe, you need an air-gapped and trusted device holding the private keys _and_ ideally running your own node (on a different device). Do you trust your hardware? Your OS? Your wallet? If the device you transact from is compromised or is susceptible to being compromised you are exposed to risk. Hence, insurance is still needed.

lowkey 4y ago
I agree with everything you are saying. Self-custody isn’t as easy as leaving your money in the bank. Also, although I see the benefits of Bitcoin I don’t think it should be the only currency option. I would like us to take this opportunity to recognize that fractional reserve banking where depositor funds are used (with leverage) to make speculative bets (on mortgage backed securities or even T-bill interest rates) is a fundamentally unsound model. I would much prefer a model where I have the option to store my funds in a full-reserve bank and would happily pay for the service. As for self-custody, it is a skill like any other and one that I think more people should learn. Self-custody is fundamentally no more difficult than say building a sound backup strategy (3 copies minimum, stored in at least two formats with at least one stored offsite) There are ample tutorials on the internet and I hope more people recognize that counter-party risk is real, whether it be fiat or crypto.