Bank Closures Spark Interest in Decentralized Finance

The recent wave of bank closures across the US has highlighted the vulnerability of the traditional banking system, prompting crypto industry experts to advocate for decentralized financial infrastructure as a more secure and reliable alternative. Some financial professionals see the current banking crisis as a sign the system is weakening, lending further credibility to decentralization and accompanying infrastructure.

For instance, Signature Bank, a New York-based lender catering to crypto clients, recently reported a loss of $160 million from loan defaults, forcing the bank to close accounts for some of its crypto customers. Similarly, Silicon Valley Bank recently closed accounts for some of its crypto clients, citing regulatory uncertainties as the reason for doing so. Rob Alcorn, CEO, and co-founder of DeFi credit marketplace Clearpool, argues that while some of the closed banks had significant connections to digital assets, the primary factors contributing to their failures were monetary and prudential policy decisions that impacted liquidity and market structure.

“In the short term, there will be additional headwinds for some crypto market participants to access USD-based banking services,” he said. “But the knock-on effects will continue to have more of an impact on centralized institutions than on decentralized protocols.” Silicon Valley Bank’s demise has all but reignited the focus on financial institutional reforms that were wound back during the presidency of Donald Trump in 2018 — namely the Dodd-Frank Act. Part of the act was to classify banks with more than $50 billion in assets as “too big to fail,” making them subject to heightened prudential standards such as stress tests, capital planning, and liquidity requirements.

This provision, in turn, gave the US Federal Reserve greater regulatory power over banks, even those it did not directly supervise. However, the Dodd-Frank Act faced resistance from the financial industry, which viewed the regulations as excessive and aimed primarily at the largest banks. As a result, Congress passed a law under the Trump administration that eased some of the Dodd-Frank rules for smaller and mid-tier banks, after years of political pressure. Proponents are now pointing fingers at digital assets as the catalyst for the failure of Signature Bank and Silicon Valley Bank, leading to a blame game amongst regulators, crypto enthusiasts, and market participants.

Alessio Quaglini, the CEO and co-founder of Hex Trust, told Blockworks the hostility towards crypto is less relevant than the failure of the overall banking system. “Compared to traditional finance, counterparty risk is far more transparent with decentralized finance and it’s events like these that make investors realize there is an alternative,” he said. Decentralization is a fundamental aspect of crypto finance that provides several key benefits, according to industry experts.

For instance, it eliminates the need for intermediaries and creates a more transparent and secure financial system. Decentralization also promotes innovation and competition by allowing for a level playing field where anyone can participate and contribute to the development of the system. To fully realize the benefits of decentralization, appropriate infrastructure is essential. This includes secure and reliable networks, decentralized storage and computing resources, and user-friendly interfaces that enable people to interact with the system easily and safely.

Setting up appropriate infrastructure is useful because it helps to ensure that the system is secure, efficient, and accessible to everyone. Ultimately, building the right infrastructure is key to realizing the full potential of crypto finance and creating a more decentralized, universal, and equitable financial system. While there are still challenges to be overcome, the recent bank closures have highlighted the importance of decentralized finance as a more secure and reliable alternative to traditional banking.