Crypto Is Better – Until It’s Not

Are cryptocurrencies better than the monetary systems we now have in place?

According to crypto proponents, these blockchain superstars will make legacy monies obsolete. They point to crypto’s advantages: decentralized, immune to inflation, no national borders to deal with, faster transactions, more secure, etc.

While cryptocurrencies are decentralized and carry no nationality imprint, many of the other advantages have proven ephemeral. There have been major hacks and losses that tell us their security is not invincible. Inflation doesn’t care what icon your currency carries – when prices go up, you spend more. And money transfer apps such as Venmo allow for immediate transactions to take place with all currencies, so that speed advantage has been neutralized, plus it’s difficult to spend crypto at most retailers.

All that may not sour boosters on crypto, but lately another leg these currencies have stood on has been kicked out from under them: The belief that being decentralized and not a part of the world’s national financial systems is a distinct advantage. The recent crash in the crypto markets shows otherwise.

Banks And Money vs. Crypto

Have your money in U.S. dollars in a U.S. bank? Well, the FDIC insures your deposits against bank failures and other losses. Want some of those dollars? Go to the bank (or its online portal) and withdraw or transfer money without a problem. Is that bank solvent? Unlike crypto vaults and exchanges, there’s the Office of the Comptroller of the Currency (OCC), which may take enforcement actions for violations of laws, rules or regulations, final orders or conditions imposed in writing; unsafe or unsound practices; and breach of fiduciary duty by institution-affiliated parties.

In other words, although banks may have financial troubles, bankruptcy is rare because the OCC ensures banks operate with sufficient reserves of cash. The Federal government is also a watchdog to prevent funds from being used for illegal purposes, such as terrorism or money laundering.

This brings us to cryptocurrencies, crypto hedge funds, and crypto exchanges. The recent crash in cryptocurrency prices caused the collapse of a number of crypto investment firms, the latest being Three Arrows Capital. This hedge fund filed for Chapter 15 bankruptcy last week. It had, just a few days before, defaulted on a $667 million load to Voyager Digital. This has led to crises in other crypto firms, particularly lenders from who the hedge fund borrowed enormous sums.

What about getting your money from crypto vaults? Voyager Digital first cut its withdrawal limits from $25,000 to $10,000. (Does your bank have limits on how much of your dollars you can have?) Even worse, Voyager has now temporarily suspended trading, deposits, and withdrawals on its platform.