---
description: >-
  Recent U.S. bank failures exposed a strange truth: depositing your money
  on-chain is safer than trusting banks to make good on your holdings, argues
  Copper’s Fadi Aboualfa.
---

# Learn: Why Tokenized Assets Are Safer During a Banking Crisis?

Maybe I’m a grim reaper of banking crises, because I’ve lived through three of them in the last decade. I’m used to banks saying some version of “actually, we’ve lost your money and that’s just a number you see on your screen….it’s not really there.”

Born and raised in Greece to Lebanese parents, and now living in Cyprus, I’ve paid for the failed risk governance of banks on this island (2013), the 2016 capital controls in Greece limiting people to 20 euros a day, and the hyperinflation and value-loss of having my dollar deposits turned to “[Lollars](https://www.quora.com/What-does-the-term-Lollar-mean-in-the-Lebanon-economic-crisis)” in Lebanon. Yes, I’ve racked up plenty of air miles travelling through Athens, Larnaca and Beirut.

None of these crises were predicted.

The Lebanese Central Bank governor, now with an outstanding arrest warrant by [Interpol](https://www.bloomberg.com/news/articles/2023-05-19/interpol-issues-arrest-warrant-for-lebanon-central-bank-governor), was once [revered as one of the best](https://www.gfmag.com/magazine/october-2019/central-banker-report-cards-2019) “financial engineers” in the world.

Cyprus has been an outstanding financial services and tax efficient hub for several decades.

Greece, a long-term European Union member, and one of the first to adopt the Euro currency,  boasts more than 20% of the global shipping fleet, the largest in the world, not to mention one of the best tourism sectors.

When a bank crisis comes to a theatre next to you, it’s not a movie you were expecting to see.

This year, we’ve seen several banks in the U.S. fail. Thankfully, the Federal Reserve seems to be listening in on the cunning yield farming mechanics seen in crypto and came up with the [Bank Term Funding Program (BTFP)](https://www.coindesk.com/consensus-magazine/2023/03/15/dont-get-your-hopes-up-svbs-demise-wont-bring-interest-rates-down/) allowing banks to mark-to-market assets held-to-maturity. It’s something like a smart-contract that holds an asset till a certain block-height and removes the dependency of an oracle so to speak. We’re happy to help, no thanks necessary.

Many American crypto outfits felt the ramifications of the loss of banking services. For example, Circle, the issuer of USDC, saw its stablecoin briefly de-peg for the very first time as it had several billion in commercial cash deposits with Silicon Valley Bank.

Had there been no intervention, Circle would have recouped a mere $250,000 of its $3.3bn cash balance from the FDIC insurance protection scheme, which was about 8% of the total assets holding the peg. All bank depositors would pay for the interest-rate risk kerfuffle to the tune of hundreds of billions of dollars. A regional, or bigger, depression would have ensued.

Crypto markets reacted correctly and incorrectly at the same time. While a de-peg was warranted until regulators came out with a plan, the total cash held at SVB was a fraction of the USDC reserve composition of underlying assets. The remaining backing for the stablecoin was in Treasury Bills, managed by [Blackrock](https://www.blackrock.com/cash/en-us/products/329365/circle-reserve-fund), a trail of assets likely held across several custodians.

Which brings us to one of the key points of this opinion piece: if you’re a high net worth individual or business, you’d be better off holding a de-pegged USDC than having a cash deposit insured up to $250k when your bank fails. It’s really that simple. And now there are a few more options developing and gaining traction on blockchain markets, such as tokenized bonds and money market funds.

Yes, digital assets really are safer than commercial bank deposits plus-government insurance during a banking crisis.

Take it from me.

### Evolving definitions of cash

Money has always constituted a part of counterparty risk – that is, who, in the event of a financial crisis, is the best position to pay the liability.

On one end of the spectrum, we have central banks offering physical cash, T-bills and bonds to the least degree of separation from a government liability.

On the other side, we have commercial banks that have a capped insurance limit because fractionalized banking means that depositors are at the behest of the risk management teams who have already loaned that deposit to someone for profit. Hence why what you consider an asset sits as a liability on the other side.

Depositors take on all the risk of banking this way and have no reward. Not even today where bonds are paying a pretty penny. Instead, they are faced with an incessant amount of obscure fees and KYC/AML measures akin to strangulation. Oh, you’ve made transfers to crypto exchanges, have you? Are you buying f[entanyl](https://www.coindesk.com/consensus-magazine/2023/06/01/why-elizabeth-warren-is-wrong-about-crypto-and-the-fentanyl-epidemic/)?

Banks, mind you, aren’t the only counter-party that have such structures. Stock and exchange brokers have similar setups, which is why there is  capped insurance on your stocks and money market funds too, albeit only to $500k, through [SIPC](https://www.sipc.org/for-investors/what-sipc-protects).

So, what’s safe?

One of the very first and primary use cases of crypto – self-custody and custody management of your private keys, allows investors to identify and remove several key risk factors.

Firstly, what is the composition of the asset. In the case of Circle USDC, it’s cash (approximately 10%) and T-Bills (about 90%). This helps identify the risk parameters clearly.

Secondly, who and how many counter-parties are involved in managing the asset cycle? In the case of tokenized real-world assets, the issuers will likely opt for segregated custody, meaning, the risk of re-hypothecation that can lead to counter-party default and loss of assets is removed.

Most importantly: it’s yours. Your keys, your assets, no middlemen pushing for a haircut.

The reality is that blockchain tech hasn’t scaled. We can’t claim success in many of the industry’s prevailing narratives over the past decade and a half. What we can say, is that despite the slow rails, there is a use case for individuals to minimize, or even remove, the liability and counterparty risk simply by managing their private keys for segregated real-world assets.

Perhaps, parked USDC is a good hedge against commercial bank failures and limited insurance protection.

Or, consider OpenEden’s T-Bill, where underlying short-term Treasuries are held in segregated accounts with traditional qualified custodian. It’s fractionalized, liquid, transferable, pays you the coupon, with no exposure to commercial banks and a direct liability to the Federal Reserve.

Until we have real-world assets directly minted on the blockchain, we must look at the best counterparty structure as of today and where the paper assets sit.

Maybe what I’ve said here hasn’t resonated with you because you haven’t been through the banking crises I’ve witnessed. Maybe you expect central banks to bail out banks when things go bad, like in 2008. Which was around the time Bitcoin was created.

[Why was that again](https://www.coindesk.com/podcasts/the-breakdown-with-nlw/13-years-on-the-meaning-of-chancellor-on-the-brink-of-second-bailout-for-banks/)?

{% hint style="info" %}
This article first appeared in Coindesk, by Fadi Aboualfa (the Head of Research at digital asset custodian Copper.co), edited by Ben Schiller.
{% endhint %}
