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Bank failures and cryptocurrencies How digital currency contributed to banking collapse By Tom Grady
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ith the recent spate of bank failures there has been nize the failure, and that failure is, simply put, disinfora lot of speculation about how such a thing could mation run amok. happen in a modern economy. We now have learned many banks relied on and/or Whether it was their borrowing or lending patterns, had invested heavily in these cryptocurrencies, and while economic flux, overreliance on bonds or investing in highfew are saying that is the sole reason they failed, the rerisk high-tech startups, there is one common element in cent collapse of the crypto market surely didn’t help. Adeach of these failures — reckless investments ditionally, one could make the case that in in cryptocurrency. wake of the spectacular failure of FTX (a “...paying things the How could this have happened? cryptocurrency exchange and hedge fund) Let’s start with the basics. A cryptocurNovember and the resulting industrywide like utility bills or in rency is a medium of exchange, like actual collapse that followed most certainly served money, that exists only in the digital world. even for groceries as a catalyst for the runs on these banks. At some level this should not be a problem And what about those investors who lost with actual dollar tens of thousands in crytpo exchanges but as so much of our modern monetary system happens in the abstract online digital world. weren’t so lucky to have their dollars backed bills is a thing of by the federal government? For most readers, paying things like utility bills or even for groceries with actual dollar For them, their only recourse is a private the past.” bills is a thing of the past. cause of action against these exchanges. FurSo, in that regard, a fully digital currency ther, I for one would conclude that we don’t seems sensible and, to some degree, inevitable. need further government regulations or new laws or buBut where cryptocurrency is different is that it is reaucracies to restrict innovation. The laws we have on largely a pure free-market, loosely unregulated invention the books are adequate. We need to let them work and we and does not rely on, nor is it backed, by the good faith need to hold those wrongdoers accountable in a court of and credit of any government. For libertarians, this is the law. utopia you had wished for. For those watching their life My advice to those who were deceived is to seek out savings or business investments evaporate, this is the legal counsel, explore your options and take action to hold dystopia you feared. these wrongdoers accountable and hopefully you can at But here’s the rub. Many of these crypto exchangleast recover some of your lost savings. es promoted themselves as fail-safe investments with implying they were indeed backed by governments or Tom Grady is a former State Representative, Florida’s chief banking insurers when, in truth, they were not. This is where regulator and the founder of CrytpoLawyers.org. those of us who support free-market economics recog-
Spring 2023
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