> What happens when more banks fail than the FDIC fund can backstop?
I’d hope we don’t have to find out. Regardless of who holds the bag, it’ll be bad. (In an ideal world, depositors will be depositing in banks with finances matching their risk profile, but I digress.)
How would crypto make this better though? Yes, self-custody eliminates the counterparty risk, but just like with USD, self-custody is just not practical for many people. Many people choose to hold their crypto in exchanges (because of convenience) or lenders (i.e., equivalent to banks, because of yields.) So doing results in similar or higher counterparty risks.
If we abolished fiat and moved to BTC, a financial system will arise on top of it which will likely closely mirror the USD financial system (actually, it already does now). If that happens, the counterparty risk for depositors remains.
I’m all for crypto, but I think it’s naïve to think that just because self-custody is a possibility, counterparty risk will go away.
If you have a significant amount of USD, you can mitigate the risk of your bank failing on you by holding physical cash or by holding T bills.
Edit to add:
Also, the no counterparty risk is mostly theoretical. I’d wager that the vast majority of people that practice self-custody of their crypto are still exposed to some (but different) risk. To be safe, you need an air-gapped and trusted device holding the private keys _and_ ideally running your own node (on a different device). Do you trust your hardware? Your OS? Your wallet? If the device you transact from is compromised or is susceptible to being compromised you are exposed to risk. Hence, insurance is still needed.
> they present significant counter-party risk for _depositors_
I’d say the risk is for _bearers_, not depositors, and even then the risk is (mostly) that of inflation, like you mention.
No one has lost their deposits in the current events. Even with the FDIC upper limits, I can’t think of many scenarios where a human person would need to hold more than $250k in liquid assets (other than in the short term), and if they did, they could split the sum over several banks.
Now, I’m not saying that the system is heading in the good direction, that the FDIC will make depositors whole in the face of systemic widespread bank failures, nor that such an event wouldn’t affect the economy in other negative ways. I’m saying, however, that the counterparty risk for the average and not-so-average person holding USD stems mostly from who controls the money supply (govt and the Fed).
The recent events show that the financial sector is a significant counterparty risk for participants in the economy, but I’m not persuaded that BTC would solve that because the problems come from institutions engaging in risky behaviour, which is independent from the currency being used to represent value. Case in point: the numerous crypto exchanges and totally-not-a-bank investing firms that crashed in the last 12 months.
Edit: Incidentally, you can self-custody USD just fine (it’s just not very practical for large amounts)
I’d hope we don’t have to find out. Regardless of who holds the bag, it’ll be bad. (In an ideal world, depositors will be depositing in banks with finances matching their risk profile, but I digress.)
How would crypto make this better though? Yes, self-custody eliminates the counterparty risk, but just like with USD, self-custody is just not practical for many people. Many people choose to hold their crypto in exchanges (because of convenience) or lenders (i.e., equivalent to banks, because of yields.) So doing results in similar or higher counterparty risks.
If we abolished fiat and moved to BTC, a financial system will arise on top of it which will likely closely mirror the USD financial system (actually, it already does now). If that happens, the counterparty risk for depositors remains.
I’m all for crypto, but I think it’s naïve to think that just because self-custody is a possibility, counterparty risk will go away.
If you have a significant amount of USD, you can mitigate the risk of your bank failing on you by holding physical cash or by holding T bills.
Edit to add:
Also, the no counterparty risk is mostly theoretical. I’d wager that the vast majority of people that practice self-custody of their crypto are still exposed to some (but different) risk. To be safe, you need an air-gapped and trusted device holding the private keys _and_ ideally running your own node (on a different device). Do you trust your hardware? Your OS? Your wallet? If the device you transact from is compromised or is susceptible to being compromised you are exposed to risk. Hence, insurance is still needed.