Traditional banks rely on ‘tiny buffer’: Paris Blockchain Week 2023

The first day of Paris Blockchain Week (PBW) is bringing more thoughts on the ongoing crisis in the global banking system, with industry executives comparing the collapses of major cryptocurrency firms like FTX with the fall of banks like Silicon Valley Bank (SVB).

On March 22, PBW hosted a panel discussion titled “FTX, Luna, Celsius, 3AC: From Hero to Zero,” bringing together industry executives from the blockchain venture firm Node Capital, crypto-friendly SIX Digital Exchange, Delta Growth Fund and crypto liquidity provider Woorton. The panel took place on PBW’s Mona Lisa stage.

According to Woorton co-founder and head of trading Zahreddine Touag, the FTX and Celsius-related meltdown in the crypto industry has been triggered by different reasons than those that fueled the ongoing banking crisis.

“It’s lack of due diligence from the investors, lack of risk management from the players,” Touag said, referring to collapses like FTX. He noted that investors often don’t realize risks of holding their crypto assets, mistakenly thinking that regulated platforms are protected from losses, stating:

“If you get regulated in France, you just have to do KYC and AML. When you do KYC, AML, it doesn’t protect you from losing the money. It does not at all. And in a lot of countries, a lot of people think that being regulated is being protected.”

There are also many other reasons like greed, especially seen among young and inexperienced investors, Touag said. According to the exec, the FTX and Celsius contagion is still not over and industry players are still looking at each other thinking who is impacted or not. “Many are impacted and we don’t know. So for the next few months, there will be more news,” he stated.

Unlike crypto collapses, the ongoing global banking issues were mainly driven by the fragility of the whole model of traditional banks, according to Touag.

“Some people are aware, but not everyone is aware that this fractional reserve system with the banks makes it very fragile,” the Woorton executive stated, adding that banks only have about 12% of their funds liquid. He said:

“The trillions they say they have on their books, they don’t have it. It’s elsewhere. It’s invested, it’s in the market, but they don’t have it. So they rely on this tiny buffer, 12%.”

Touag added that troubled banks like SVB often depend on jurisdictions in Europe and the United States, while relying on this “tiny buffer” and expecting that “no one will pop up at the store asking for money.” According to Touag, it’s the same story with bigger banks like Morgan Stanley or JPMorgan, but people keep thinking that they are “too big to fail.”

“That’s what happened with SVB,” Touag said, adding that Silvergate’s issue was “a bit different.” He also argued that Signature’s crisis is “another story, because the bank is not closed.” Touag stressed that Signature was just taken over and his company used Signature this morning. He added:

“In the crypto banking system, the best place to bank is Signature. Why? Because the regulator said that they will make every single depositor whole. So we know that our money is safe there, even if they go bankrupt, our money is saved.”

As previously reported, the New York State Department of Financial Services took over Signature on March 12, appointing the FDIC as the receiver. According to Barney Frank, a former member of the U.S. House of Representatives, the regulators took action against Signature despite no insolvency.