The Crypto Banking Apocalypse – PostRaise

Source: Huffington Post

If you’re thinking Cyprus is a little country, it’s a one-off, it couldn’t happen in a G20 country, not to my bank, not in my country. Well, think again…

On the weekend of November 16th 2014 in Brisbane Australia, the G20 ratified banks ability to “do a Cyprus”.

What could that mean for CBs?

Many CB’s have a lot of money in the bank (much more then €100k/$250k), not many have that money spread out over multiple banks, so it’s the old all eggs in one basket routine. Just imagine Crypto founder X waking up one-day thinking arent I great, my business is going swimmingly and we have 5mil in the bank. Later that day he finds out his bank needed some cash so they swapped some shitty bank stock for his lovely cash or they simply gave him a 50% haircut on the deposit amount over the protected amount. Too bad if that means he needs to fire some of his team, they cant implement the latest update to their protocol or platform and investors are screaming and shouting… a rough day all round.

Gating of funds / transfer-withdrawal limits

This already happens to some extent e.g. when a transfer is going to a new recipient perhaps in a new country or maybe the size of the transaction is “out of the ordinary”. Now add banks being in trouble, banks not trusting other banks, regulators being heavy-handed and in some countries, politicians/governments stepping in and pressuring banks to disallow transfers and withdrawals to their customers.

What could that mean for CBs?

Imagine you are a fund or exchange and part of your everyday activity is moving millions of Fiat money through the legacy banking system so you can service your customers, take advantage of investment opportunities, settle margin calls etc. Now imagine your bank saying you can’t move more than 10k per day which is a fraction of your normal volume. All of a sudden your business grinds to a halt, 10k per day doesn’t even cover rent, salaries & lawyer fees… Oh shit!

Conclusion

To be crystal clear, I truly hope I’m 100% wrong and none of the above plays out but having lived through 2008–9 while working in finance in London, watching the financial system grind to a halt and knowing how difficult it already is for CBs to obtain and maintain banking, I don’t see how things get better or stay as they are when the next financial crisis hits.

That’s a pretty bleak outlook I know but there is a way to minimize the potential damage and it lies in a financial concept most of us are familiar with. Diversification

Diversification in this sense means going overboard on the number of bank accounts you think you need. As a Crypto founder, you look yourself in the mirror and you say I need 2 bank accounts for my business to function as things stand. If that’s the case get 5! If you think you only need those accounts in your home jurisdiction, add at least 1 other jurisdiction, if not 2. Spread your eggs in as many baskets as possible, that way if things get worse, after the banks have purged their high-risk clients, you may have lost 3 of your accounts but that still leaves you with 2 and you can soldier on.

I know founders both in the Crypto and traditional startup scene and they are always looking for an edge over their competition. In the Crypto space, having more banking options is already a huge advantage, now imagine you were a good Crypto squirrel, you collected all of your banking nuts and a particularly brutal winter hits. You are safe in your tree with a mountain of nuts while your competitor squirrels are starving and freezing to death as they didn’t gather enough banking nuts.