Bank failures and cryptocurrencies

By Tom Grady

With the recent spate of bank failures there has been a lot of speculation about how such a thing could happen in a modern economy.

Whether it was their borrowing or lending patterns, economic flux, overreliance on bonds or investing in highrisk high-tech startups, there is one common element in each of these failures — reckless investments in cryptocurrency.

How could this have happened?

Let’s start with the basics. A cryptocurrency is a medium of exchange, like actual money, that exists only in the digital world. At some level this should not be a problem as so much of our modern monetary system happens in the abstract online digital world. For most readers, paying things like utility bills or even for groceries with actual dollar bills is a thing of the past.

So, in that regard, a fully digital currency seems sensible and, to some degree, inevitable.

But where cryptocurrency is different is that it is largely a pure free-market, loosely unregulated invention and does not rely on, nor is it backed, by the good faith and credit of any government. For libertarians, this is the utopia you had wished for. For those watching their life savings or business investments evaporate, this is the dystopia you feared.

But here’s the rub. Many of these crypto exchanges promoted themselves as fail-safe investments with implying they were indeed backed by governments or insurers when, in truth, they were not. This is where those of us who support free-market economics recog- nize the failure, and that failure is, simply put, disinformation run amok.

We now have learned many banks relied on and/or had invested heavily in these cryptocurrencies, and while few are saying that is the sole reason they failed, the recent collapse of the crypto market surely didn’t help. Additionally, one could make the case that in the wake of the spectacular failure of FTX (a cryptocurrency exchange and hedge fund) in November and the resulting industrywide collapse that followed most certainly served as a catalyst for the runs on these banks.

And what about those investors who lost tens of thousands in crytpo exchanges but weren’t so lucky to have their dollars backed by the federal government?

For them, their only recourse is a private cause of action against these exchanges. Further, I for one would conclude that we don’t need further government regulations or new laws or bureaucracies to restrict innovation. The laws we have on the books are adequate. We need to let them work and we need to hold those wrongdoers accountable in a court of law.

My advice to those who were deceived is to seek out legal counsel, explore your options and take action to hold these wrongdoers accountable and hopefully you can at least recover some of your lost savings.

Tom Grady is a former State Representative, Florida’s chief banking regulator and the founder of CrytpoLawyers.org.