None of these crises were predicted, said Fadi Aboualfa, Head of Research at digital asset custodian Copper.co. Money has always constituted a part of counterparty risk—that is, who, in the event of a financial crisis, is the best positioned to pay the liability.
Crypto assets are proving to be a safer option than bank deposits during a banking crisis. Born and raised in Greece to Lebanese parents, and now living in Cyprus, Fadi Aboualfa has experienced three banking crises in the last decade. He has seen banks lose money and the Federal Reserve come up with the Bank Term Funding Program (BTFP) to help banks mark-to-market assets held-to-maturity.
Many American crypto outfits felt the ramifications of the loss of banking services. For example, Circle, the issuer of USDC, saw its stablecoin briefly de-peg for the very first time as it had several billion in commercial cash deposits with Silicon Valley Bank. Had there been no intervention, Circle would have recouped a mere $250,000 of its $3.3bn cash balance from the FDIC insurance protection scheme.
Crypto markets reacted correctly and incorrectly at the same time. While a de-peg was warranted until regulators came out with a plan, the total cash held at SVB was a fraction of the USDC reserve composition of underlying assets. The remaining backing for the stablecoin was in Treasury Bills, managed by Blackrock, a trail of assets likely held across several custodians.
Self-custody and custody management of private keys allows investors to identify and remove several key risk factors. Firstly, what is the composition of the asset? Secondly, who and how many counter-parties are involved in managing the asset cycle? Most importantly, it’s yours. Your keys, your assets, no middlemen pushing for a haircut.
Until we have real-world assets directly minted on the blockchain, we must look at the best counterparty structure as of today and where the paper assets sit. OpenEden’s T-Bill, where underlying short-term Treasuries are held in segregated accounts with traditional qualified custodian, is a good example. It’s fractionalized, liquid, transferable, pays you the coupon, with no exposure to commercial banks and a direct liability to the Federal Reserve.
Maybe what I’ve said here hasn’t resonated with you because you haven’t been through the banking crises I’ve witnessed. Crypto assets are proving to be a safer option than bank deposits during a banking crisis.