I’ve spent a bit of time in this space thinking about cryptocurrency and making an argument for why community banks should get involved in some way. Is it time for me to eat crow?
You have undoubtedly heard about cryptocurrency exchange giant FTX and its infamous young CEO’s fall from grace. FTX quickly rose to a valuation of $32 billion at its peak, but in November of last year — while its name still adorned the Miami arena where the Heat play basketball — the company filed for bankruptcy. Allegations of myriad fraud violations have ensued. FTX’s bankruptcy also comes on the heels of two other well known crypto-exchange bankruptcies: Voyager and Celsius. Cryptocurrency is currently a real mess, the kind risk-averse community bankers justifiably don’t want to touch with a pole of any length. Yet, I’m not eating crow. Not yet!
In my estimation, the failures of these exchanges have just about nothing to do with the underlying technology that makes crypto money possible. Afterall, banks also fail, but no one ever blames the U.S. government’s currency for causing the problem. What crypto does have is hype, and boy does the tech industry love hype. The more hype, the better. Investors also love hype. Crypto-exchange failures are fueled by unkeepable promises supporting a teetering heap of hype and investors falling over themselves to pile on. FTX failed for reasons that are all too human. Don’t blame the robots!
Were I the type of person to make a big bet on a crypto exchange investment, I’d also bet against any community banker being utterly convinced by me to jump into encrypted currency. Once again, in spite of all the bad press it’s currently receiving, I still think community banks should get involved. They may not have a choice someday fairly soon: The Federal Reserve Bank of New York has quietly launched a U.S.-backed digital dollar.
From the New York Fed’s press release announcing its central bank digital currency: “This U.S. proof-of-concept project is experimenting with the concept of a regulated liability network. It will test the technical feasibility, legal viability, and business applicability of distributed ledger technology to settle the liabilities of regulated financial institutions through the transfer of central bank liabilities.”
Translation: “We’re going to try using blockchain to settle debts, but you can trust us, right?”
This project was publicly launched nearly on the same day FTX filed for bankruptcy. Good timing! But in the case of digital currency exchanges failing, hate the player, not the blockchain.
This will continue to be a tough sell for community banks, and understandably so. The Independent Community Bankers of America is decidedly not in favor of the NY Fed’s project.
“As a liability of the Fed, a CBDC positions the Fed as a direct competitor for bank deposits that fund lending,” the ICBA said in a press release in 2022. “The Fed concedes that a CBDC ‘substitution effect could reduce the aggregate amount of deposits in the banking system, which could in turn increase bank funding expenses, and reduce credit availability or raise credit costs for households and businesses.’ In other words, a CBDC could create an outflow of deposits from community banks with a direct and adverse impact on credit availability. Depositors may prefer CBDC over bank deposits in a crisis.”
The Fed realizes that messing with community banks’ deposits is fighting words, but it isn’t testing the CBDC waters just to make bankers mad. In this case, the Fed doesn’t have much of a choice but to at least study the reality of a CBDC (their announced experiment will end the first quarter of 2023, followed by a report). Other developed and underdeveloped nations certainly are.
Maybe the only safe bet when it comes to new tech breaking through old systems is that it does not retreat. Will a future featuring cryptocurrencies and blockchains as important financial and accounting tools make community banking irrelevant? No way. Will it force community banks to adopt practices and offer products it would rather not to stay competitive? Yes. If I sound like a big fan of this tech, I am not. In the wild, cryptocurrency struggles. With the full faith of the U.S. government backing an exchange, however, a step is being taken to acknowledge reality and tame crypto. This simply must be done.