On Bank Runs and Celsius
Over the weekend, we saw Celsius halt customer withdrawals and the crypto market has not reacted well. At the time of writing, ETH is down > 35% over the trailing week.
Since the news, I’ve seen many posts, but most are about either :
- Counterparty risks
- “not your keys, not your coins”
- Life savings becoming inaccessible overnight
Instead of contributing to that, I want to focus on the lessons that history can teach us and what it means for the industry going forward. To do that, let’s reframe the conversation: what we’re seeing right now looks very similar to a TradFi “bank run”.
What is a bank run? According to Investopedia:
“A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency.
As more people withdraw their funds, the probability of default increases, prompting more people to withdraw their deposits. In extreme cases, the bank’s reserves may not be sufficient to cover the withdrawals.”
In essence, customers afraid that the institution will implode rush to take their assets out. As the depository institution makes loans secured by deposits, removing deposits means that they need to call in their loans before they run out of available cash and risk being unable to meet withdrawals. If they fail to satisfy withdrawal demand, they collapse and any depositors who still had deposits there could lose everything.
Once upon a time, bank runs were common in the US and exacerbated many economic downturns. At the time, one of the few tools banks had was to try to close their doors in order to buy time to call in their loans and assure customers that they would be able to redeem all withdrawal requests. With the Great Depression, the government had to implement a bank holiday to give banks breathing room. They also introduced the concept of deposit insurance - today, we know it as FDIC (Federal Deposit Insurance Corporation). Its existence eliminates the risk that a depositor will lose their life savings in the event of a bank collapse, and thus mitigates the risk of a bank run.
Why am I focusing on this? Because there is opportunity in every crisis.
Instead of only borrowing risks from TradFi’s history (ie bank runs, insolvency) why not borrow from its solutions, where there’s precedent, and especially if they’re applicable? Why can’t a similar solution exist in the crypto industry? Since regulation, while inevitable, is still nascent in the space, the industry has the opportunity to create its equivalent solution and de-risk itself before there is a reactionary mandate. This would be prudent on several levels: it would show that the space is maturing, it would highlight a desire to protect end-users, and moreover, it would signal that the industry is responsible and capable of self-regulating.
Some may argue that it would introduce centralization and that self-custody is the only way to truly be safe. Yes, self-custody is probably safer. But I’d also argue that CeFi is a prerequisite for broader crypto adoption. For some people, centralized solutions will be their only way to onboard to crypto as it is most similar to their existing experiences.
Critically, a discussion about custody and broad adoption misses the point.
Should the crypto industry take charge of its own future? I think that’s a resounding yes.
Should the crypto industry learn from and use TradFi’s history to its own benefit? I think it would be criminal not to.