Ten years ago, a strange new digital currency called bitcoin (BTC) caught my attention for the first time as its price surged during the Cyprus banking crisis. Local authorities had infuriated Cypriots by slapping a 10% tax on withdrawals, unwittingly encouraging some to warm to the idea of bankless digital money. Per Omkar Godbole’s reporting, I’m not alone in seeing parallels between the past week’s events. Again, bitcoin’s price has rallied on speculation that stress among U.S. and European banks will open people’s eyes to the leading cryptocurrency’s censorship-resistant, intermediary-free qualities. But if this is bitcoin’s “Cyprus moment,” the context is very different from 2013. With crypto now embedded in public consciousness – negatively, mostly – the industry faces its biggest ever test, one that involves an intensified struggle with the financial establishment. Recall that the Bitcoin blockchain was born out of the chaos of the 2008-2009 financial crisis, with Satoshi Nakamoto’s immortal timestamp on Jan. 3, 2009, inscribing a headline from that day’s London Times: “Chancellor on the brink of second bailout for banks” (chancellor being the U.K.’s finance minister). That crisis highlighted how our dependence on banks to run the plumbing of our money and payments leaves the entire economy vulnerable to mismatches in banks’ investments and liabilities, which can undermine their ability to honor deposits. And it showed how the largest banks, whose interwoven credit exposures create “systemic risk,” exploited their “Too Big to Fail” status – the idea that governments would always bail them out to protect the economy – to place asymmetric, high-return risky bets. It showed how Wall Street (and other financial centers) in effect, hold our democracies hostage. Now, with the collapse of three high-profile banks, hundreds of regional banks facing worrying outflows, the U.S. Federal Reserve creating a new backstop facility reportedly worth $2 trillion, and Switzerland’s central bank bailing out Credit Suisse to the tune of $54 billion, the echoes of that prior crisis are loud. As the Fed and the Federal Deposit Insurance Commission scrambled last weekend to put a funding plan in place so that thousands of startups with deposits at Silicon Valley Bank would meet payroll this week, we got a flashback to Sept. 17, 2008. On that day, two days after the collapse of Lehman Brothers, the Reserve Primary Fund – used by companies to manage their cash reserves – “broke the buck.” We feared then that failures at similar short-term money market funds would lead to widespread chaos in the economy-wide system for paying employees and commercial contractors. Now, with SVB contagion spreading to smaller regional banks, depositors have fled en masse into Wall Street’s too-big-to-fail institutions, making them even bigger. To an unprecedented degree, that will position an elite group of bankers as gatekeepers of our economy – a centralizing power that’s already showing signs of overreach. As angel investor and Myth of Money newsletter author Tatiana Koffman wrote in a CoinDesk OpEd, “Bitcoin is made for this moment.” If people continue to lose confidence in banks’ ability to keep their money safe, the narrative around Bitcoin’s self-custody model will only get stronger. Its appeal will be further enhanced if the Fed is forced to reverse course and cut interest rates, which could weaken the dollar. (That prospect grew stronger Thursday with news of an unexpected softening in U.S. inflation.) At its core, money is a confidence game, a matter of faith and trust among the population that uses it. It’s likely that confidence in governments and their banking partners will wane in the aftermath of this banking crisis. But crypto is, for now, dealing with an even bigger mistrust problem. As this battle to redefine money unfolds, it’s incumbent on members of the crypto community to engage in behavior that breeds confidence. If they can achieve that, the future is theirs. | 