How Bitcoin and other magical internet currencies are jeopardizing your financial health

The collapse of Silicon Valley Bank (SVB) last week raises more serious issues than the obvious ones that the financial press and a wide range of Washington politicians have been talking about.

Foremost among these are bank loans on questionable assets. That doesn’t get much if any attention in the news or from Washington and is likely to be swept away soon, allowing unnecessary banking practices to continue.

Before its collapse last week, SVB borrowed money from Bitcoin and other cryptocurrencies.

Question: why is any bank allowed anywhere to accept crypto as collateral for a loan?

Bitcoin and its imitators are not money. They are not money. They are not usually used for buying and selling, a fact that is not surprising because by design the Bitcoin system can process only seven transactions per second compared to many thousands of transactions per second for credit cards.

Indeed, except for the proceeds of illegal drug trafficking and hiding assets from creditors, divorced people, and the tax police, cryptocurrencies are useless.

High-tech Ponzi Scheme

Cryptocurrencies and their cousins, Non-Fungible Tokens or NFTs—are simply a Ponzi scheme at its finest. Instead of Charlie Ponzi or Bernie Madoff running the con himself, the crypto scam relies on computer blocking and “mining” mathematical solutions.

The founder of Bitcoin, who went by the pseudonym Satoshi Nakamoto, has never been identified. He has disappeared, leaving the owners of the digital string worth only the next fool, or scoundrel, to pay for this imaginary asset.

Early participants in Ponzi schemes make huge profits when they cash out while gullible souls who are absorbed later wipe out. That’s what happened to SVB, America’s 16th the biggest bank, which was big in crypto loans.

Many Bitcoin “investors” have already been wiped out as Bitcoin’s “market cap” dropped from about $1.3 trillion in 2021 to about $389 billion on Friday, down nearly 70%.

Why do banking regulators allow our internationally insured banks to make loans using magic internet money as collateral? That’s the opposite policy, no different than allowing banks to accept buckets of ice cubes in the winter as collateral, even though they melt in the spring and evaporate in the summer.

Silicon Valley Bank is one of the federally insured financial institutions that accepts cryptocurrency as collateral for loans. Some banks will lend you 90% of the apparent value of your crypto, although a 50% loan is more common and that seems to be the standard at SVB based on its web pages.

Zero Interest Crypto Loans

All kinds of financial news outlets offer advice on borrowing against crypto. These include NerdWalletand dishonesty and dishonesty Forbes. People with crypto can even borrow with zero interest. Gadzooks!

For a closer look at the main risks of crypto loans read Investopedia’s article.

After the second largest bank failure in history, you should be very concerned that for more than four decades we have failed miserably in banking regulation. That history contrasts with the period from 1935 until voters rejected successful New Deal banking regulations in favor of Reaganomics.

We took a wrong turn when the prudent New Deal banking rules that had been in place since 1935 were killed by Reaganomics, which reregulated banks to reduce regulation and increase the risk of financial institution failure. (There is no such thing deregulationonly a new law, in our time in terms that usually means laws that favor companies, including banks, over customers, financial prudence, and public safety.)

Role of Congress

What we need now is a Congressional hearing to examine the reasons why cryptocurrencies can be used as collateral for bank loans.

Contact the White House by writing via the hyperlink or calling 202-456-1111 to request a ban on crypto as collateral for loans. Call 202-456-1111.

Even if you don’t own Bitcoin or its growing list of alternatives this story is important to you for many reasons.

Your money is insured up to $250,000 only. Any amount above that is not covered by insurance. That means if you are a trustee of a non-profit organization, for example, and it has $1 million in the bank you or the organization you lead is at risk of being wiped out by a bank failure.

The federal government covers all deposits at SVB and Signature Bank in New York, which failed on Sunday. But that doesn’t mean it will be. During the previous banking crisis, non-profit organizations with over-guaranteed guarantees and $100,000 lost their deposits in excess of that amount, which didn’t get much news at the time.

If people want to buy crypto, they should be free to do so. But they should not be allowed to put our bank money and investments at risk by using these digital tokens as collateral for loans. After all, it’s yours, and my bank deposits, and those of businesses, non-profit organizations, and our governments that banks use to borrow money, so it’s not like we don’t have a vested interest in banning crypto of any kind as collateral. with a loan.

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