How Blockchain Can Shed Light On Bank Solvency
In case you haven’t heard, the international banking system is facing a crisis (yet again). It all began with an issue on Silicon Valley Bank’s (SVB) balance sheet and has since escalated into the most significant liquidity crisis since Lehman Brothers’ grand exit in 2008. Unsurprisingly, this chaos underscores the pressing need for transparency in the banking system and the potential for trust-less, auditable alternatives like blockchain to transform the way we manage and comprehend our finances.
As SVB’s situation demonstrates, the information vacuum stemming from a lack of current data breeds speculation, fear, and uncertainty — not only for that particular bank, but for the entire banking sector. The absence of auditability and real-time data in the industry hinders our ability as customers to grasp the intricacies of a specific financial situation or crisis. Blockchain’s inherent transparency could offer a solution to prevent future financial bewilderment, and possibly the crises themselves, while also equipping individuals with real-time financial insight.
Some Quick Background: The Transparency Crisis.
The financial sector has long been cloaked in mystery, making it challenging for individuals and businesses to genuinely comprehend their financial status or the institutions handling their money. In the public sector (i.e., banks traded on exchanges like the NYSE or NASDAQ), financial information is typically limited to annual or quarterly reports (the 10-K and 10-Q). For private banks, insights into their financial health are rarely visible beyond the boardroom. Thus, unless you’re a credit union member with a legal right to know the financial state of your chosen institution, you — the average bank customer — are just as shocked by a collapse during a financial crisis as everyone else!
Fundamentally, this lack of transparency breeds fear and distrust in a system that we all depend on for essential tasks (like purchasing exorbitantly priced eggs). When a bank’s financial stability is called into question, customers often have no choice but to await official documents or announcements for clarity on their bank’s solvency. This, in turn, can trigger panic and a scramble to withdraw funds, resulting in further instability within the system (cue the bank run).
So how would blockchain help?
Blockchain technology, the bedrock of cryptocurrencies like Bitcoin and Ethereum, provides a decentralized and transparent means of conducting transactions. Utilizing cryptography and a distributed network of computers, blockchain guarantees that each transaction is secure, traceable, tamper-resistant, and most crucially, public. This transparency enables users to observe and confirm an institution’s financial health in real time, potentially helping to avert fear-driven bank runs and collapses.
In a world where a crypto bank exists, if I — a random individual — wanted to assess the financial health of my bank, I wouldn’t need to physically visit the bank to gather information. Instead, I could simply access Etherscan (or a similar crypto reference platform) and browse my bank’s vaults to gauge their overall financial well-being. Likewise, those savvy financial journalists could do the same; thus, instead of encountering an article titled “Is BankX in Crisis?”, I’d see one that confidently states, “BankX is Definitely in Crisis, We Know Because We Checked!”
In simpler terms, imagine a world where you no longer need to depend on your bank’s statement proclaiming, “OuR LiQuIdItY Is StRoNg!!!” when its financial status comes under scrutiny. Instead, you could simply examine their current balance sheet and make your own informed decision, or consult experts who have analyzed the numbers. This degree of transparency could encourage trust, stability, and better decision-making in the financial sector, as opposed to the murky “trust us because we are Chase / Wells Fargo / Bank of America” rhetoric prevalent today.
By integrating blockchain technology into our banking system, we can democratize access to financial information and empower individuals & businesses to make informed choices about their money. In the existing system, information accessibility is limited by the bank or their regulators, and auditability is only as reliable as the auditors. With a blockchain-based system, financial markets would be subject to the scrutiny they deserve, and the knowledge once guarded by a select few institutions would become accessible to all. Liquidity crises could be averted since banks would have the same public visibility for their books as you or I have for our personal bank or brokerage accounts. Rather than a single bank engaging in internal dialogue and decision-making, which may foster groupthink, the accounting would become public.
In SVB’s case, having open books on-chain would have allowed for greater insight into their balance sheet’s financial specifics. The tenacious nature of American journalism increases the likelihood that potential errors of judgment would have been detected earlier, and that the financial collapse would have been monitored accurately, rather than fueled by speculation in an information vacuum.
This enhanced transparency would pave the way for a fairer financial system, where everyone has the tools and information necessary to prosper. And frankly, in a world where liquidity crises seem to occur once every decade, I would prefer to have that information at my fingertips, rather than be left guessing.