Last weekend, the stablecoin USDC ran into trouble due to a domino effect caused by traditional banks. In these banks, the company behind USDC, Circle, had a large part of its reserves. Calm has returned somewhat, but Circle and the exchange Coinbase also point to the problems that the traditional financial world, also known as ‘TradFi’, has caused.
Circle is critical of Tradfi
Crypto land is currently in a separate situation. Where usually the crypto sector is the piss, this time it was the traditional banks that did not have their affairs in order and damaged the crypto sector.
“What happened in the last few days is kind of an ironic ‘black swan’ event. Where normally the contamination takes place from crypto to TradFi, it was now the other way around.”
According to Circle’s Caroline Hill. Three banks that Circle partnered with to safeguard its reserves failed within a week, and USDC briefly lost its link to the dollar. USDC has since reestablished its link, but according to Hill, new regulations are still urgently needed.
“The market has recovered. But it’s another reason why I think regulation is urgently needed. Ultimately, our reserves depend entirely on the fractional banking system.”
The risk of traditional banks
Hill hints at the flaws and risks of the link between the crypto sector and the fractional banking system. Simply put, this system means that traditional banks only need to hold a small portion of the deposits as reserves. At a potential bankrun such a situation can have dramatic consequences as we saw with these banks last weekend.
Another problem is that relatively few banks want to do business in the crypto sector due to the unclear regulations. Although institutional interest is increasing, it is a step that few banks dare to take with conviction. According to Scott Bauguess, that limited amount of ‘crypto banks’ currently creates a great risk for the crypto sector.