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Banking Evolution in the Age of Bitcoin: Adapting or Fading Away?

Bitcoin First Republic Bank Crisis
By Nicolo Finazzi
Nicolo Finazzi

4 Min

August 28, 2023

During the first days of May 2023, we witnessed two major financial events regarding Bitcoin and the financial system.

  1. Bitcoin hit an all-time high for the number of daily transactions processed (682k).
  2. The fall of yet another major institution: First Republic Bank. The bank had $229 billion in assets, making it the second-biggest bank to collapse in U.S. history.
All time Bitcoin transactions chart
All-time Bitcoin transactions chart

Let’s discuss these in the context of the larger financial system. Is there a connection between the two? The traditional banking system is actually failing? Is crypto going to replace it?

Things are moving fast in the financial world, and we are getting used to the announcements of major banks failing. This trend has gained momentum throughout the year, with a notable example being the failure of Silicon Valley Bank on March 10, closely followed by the demise of Signature Bank just two days later and on May 1st by the previously cited First Republic Bank. Even more recently, on July 28, we witnessed the collapse of Heartland Tri-State Bank of Elkhart, Kansas. This became the fourth FDIC-insured bank to fail this year, which deepens uncertainty regarding the traditional banking system.

As part of this trend, getting back to our focus case, we witnessed the US government's intervention to partially save First Republic Bank. This was seized by regulators and sold to JPMorgan Chase (currently the largest bank in the United States).

“Our government invited us and others to step up, and we did”, JPMorgan CEO Jamie Dimon said.

The Role of Governments

This suggests that governments are playing a substantial role in preserving the traditional banking system. However, it raises critical questions about whether their actions truly align with the genuine financial needs and desires of the public. Surveys indicate that an increasing number of individuals are exploring alternative financial solutions, with recent studies showing that 60 percent of consumers are very or somewhat interested in using a digital bank over traditional ones in the next year. Moreover, the shift towards cashless transactions is undeniable. For instance, in the Euro area last year, cash payments accounted for 59% of point-of-sale transactions, down significantly from 72% in 2019. Digital payments are poised to dominate the industry, and worldwide statistics confirm the growing trend. Accordingly, the total transaction value in the Digital Payments market is projected to reach $9 trillion by the end of 2023.

At LAB51, we firmly believe this event is part of a broader trend concerning asymmetries in financial markets. These asymmetries are characterized by a significant divergence between what banks have to offer and what people actually want. The data indicates that this disparity is driving banks toward a crossroads. They need to either adapt and bridge this gap or face the risk of obsolescence. In essence, banks need to evolve.

Is Bitcoin causing banks to fail?

How does Bitcoin and its recent success fit into this narrative? While it is true that Bitcoin’s price rose steadily during the cycle of banking failures, this doesn't necessarily indicate that people are choosing "trustless" financial systems based on Blockchain over “untrustworthy” banks. It doesn't even mean that Bitcoin can already be considered a hedge against financial catastrophes. In fact, the timing of this Bitcoin milestone is somewhat incidental. In practical terms, it may be attributed to the market's growing interest since the introduction of Bitcoin Ordinals, which allowed the network to support NFTs.

However, what is true is that Bitcoin and cryptocurrencies are emerging as alternative monetary systems. In this sense, many believe it could eventually serve as a legitimate global currency like the U.S. dollar is today.

Cryptocurrencies and blockchain networks are becoming more attractive as financial assets. At LAB51, we believe that their characteristics of decentralization, transparency, and algorithmic systems may actually become the key to solving the asymmetries that characterize the current financial system.