Tokenized Assets: A Safer Alternative During Banking Crises
Living through multiple banking crises has made me acutely aware of the vulnerability of traditional banking systems. From personal experiences in Greece, Cyprus, and Lebanon, I've witnessed the loss of savings and the devaluation of currencies. These crises were unexpected and had severe consequences for individuals and businesses alike.
In the United States, we have also seen several banks fail this year alone. However, the Federal Reserve has taken note of the innovative yield farming mechanisms seen in the crypto industry and introduced the Bank Term Funding Program (BTFP). This program allows banks to mark-to-market assets held-to-maturity, similar to smart contracts that hold assets until a certain block-height, reducing dependency on external oracles.
The loss of banking services has had repercussions for American crypto companies as well. Circle, the issuer of USDC stablecoin, experienced a brief de-pegging incident when its commercial cash deposits with Silicon Valley Bank were affected. Without intervention, Circle would have only recovered a fraction of its cash balance through the FDIC insurance protection scheme, causing significant losses for all bank depositors. This scenario could have led to a regional or even larger-scale economic depression.
While the crypto markets reacted both appropriately and inappropriately to this situation, it brought to light an important aspect: high net worth individuals and businesses may be better off holding de-pegged USDC or other digital assets during a banking crisis rather than relying on cash deposits insured up to $250,000. The emergence of tokenized bonds and money market funds on blockchain platforms offers additional options that are gaining traction.
One key reason why tokenized assets are considered safer is that they provide greater transparency and control. Traditional banking systems often involve counterparty risks, with depositors relying on banks to manage their funds and facing the potential loss of assets. In contrast, self-custody and custody management of private keys in the crypto industry allow investors to directly manage their assets, removing intermediaries and the risk of asset mismanagement.
Tokenized assets also offer clear visibility into asset composition. For instance, Circle USDC comprises approximately 10% cash and 90% Treasury Bills, providing a clear understanding of the underlying asset mix. Moreover, the involvement of multiple counterparties in managing the asset cycle can be minimized through segregated custody arrangements for tokenized real-world assets. This reduces the risk of counterparty defaults and loss of assets.
Furthermore, the ownership of tokenized assets lies with the individual investor, eliminating the need for intermediaries and reducing the risk of external influence or asset seizure. By managing their private keys, individuals gain greater control over their assets and minimize counterparty risk.
It is important to note that blockchain technology is still in its early stages and faces scalability challenges. However, the use case of self-custody and custody management for segregated real-world assets provides a practical solution to mitigate liability and counterparty risk. Tokenized assets, such as parked USDC or assets like OpenEden's T-Bill, held in segregated accounts with traditional qualified custodians, offer a hedge against commercial bank failures and limited insurance protection. These assets provide fractionalization, liquidity, transferability, and direct liability to institutions like the Federal Reserve, thereby reducing exposure to commercial banks.
While we await the direct minting of real-world assets on the blockchain, it is crucial to evaluate the best counterparty structures available today and consider where paper assets are situated. By embracing tokenized assets and leveraging the benefits of blockchain technology, individuals and businesses can navigate banking crises more securely and protect their wealth from the risks associated with traditional banking systems.