Thoughts on a Terrible, Horrible, No Good, Very Bad Week and How the Landscape Could Alter Going Forward
Much has already been written and tweeted about what led to Silicon Valley Bank’s (SVB) failure and what might occur in the next few days and weeks. I won’t add to that chatter here. What I want to do instead is provide some initial thoughts on how the entire landscape might alter going forward and especially what it might mean for the blockchain ecosystem.
It’s hard to understate what a critical role SVB played in the innovation ecosystem of the United States. It was at the center of it all and having an account at SVB was a milestone for those who participated in it, the equivalent of getting a driver's license that allowed one to begin their entrepreneurship journey in earnest.
I have a lot of thoughts juggling around my head, but will focus here on just 5 areas where we could see the landscape alter substantially.
Our public institutions are no longer fit for purpose in a digital era and need to be modernized. This has been a trend since the advent of digital technology, but the technology gap between regulators and the market is now dangerously wide. Regulators and policymakers seem to have been caught off guard by SVB and the impact social media could have in a bank run. Our public institutions, and regulators in particular, are in desperate need of an upgrade. Unfortunately many regulators have deprioritized innovation efforts in recent years. I hope this is the event that makes it clear that putting the onus on industry to be backward compatible with the regulatory tools of yesteryear (e.g. manually uploaded quarterly call reports vs real time data) is no longer a tenable regulatory strategy.
How to regulate blockchain related products and services could become subsumed within a larger conversation about how to regulate in a digital era more generally. The blockchain space has been center stage for the past 12 months among financial regulators and policymakers. The focus could widen to the entirety of digital financial services. This might delay blockchain specific legislation or rules, but also make it more likely they are considered in a more holistic context or part of a more overarching set of changes.
Optionality and redundancy will be the name of the game for founders and companies. A difficult regulatory environment in the US was already prompting founders to pursue greater optionality and redundancy with regards to licensing and jurisdictions. Now they will do the same with banking partners and other critical vendors. This will add complexity and cost, but also opportunity for those who make this complexity easier to navigate. Unfortunately the ability to diversify has been limited for companies in certain sectors, including blockchain, because regulatory guidance has made it harder for banks to service this space, thus reducing the number of options available to companies.
The threat of flight to offshore jurisdictions will no longer be a threat. I’ve historically discounted threats from industry about moving offshore. But with trust in the US banking system significantly shaken, I expect it will become more of a meaningful trend. This won’t mean companies will shift offshore completely or immediately, but you will see them begin to prioritize other markets more significantly than they have in the past and establish relationships with banks and other partners in jurisdictions that provide greater predictability.
Self reliance in the form of self custody will become an accepted and prudent risk management strategy for consumers and businesses alike. I’ve held the view that the first digital native generation, Gen Z, will also be the first to make self custody a meaningful part of their financial lives. As part of an overarching financial diversification and emergency plan, it will no longer be considered extreme or unusual for an individual or business to self custody some meaningful portion of their assets, say six to twelve months of expenses, for a black swan or rainy day scenario. I don’t expect this advice to find its way into Kiplingers anytime soon, but will gradually become more accepted over time.