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Bitfinex scandal – Bitcoin stops bank runs

Yesterday crypto markets plunged as the New York Attorney General’s office alleged that Bitfinex had been co-mingling company and client funds. Interestingly, the best coverage of this issue was not from the crypto press but by the noted economist Tim Worstall in The Continental Telegraph.

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What is most interesting about this scandal is that it shows the strength of Bitcoin. Bitfinex is one of the largest crypto exchanges and holds several percent of the whole market crypto capitalisation in escrow. In spite of this, the market only dipped 5% which is pretty much a normal-day in the crypto world.

One reason for this is that unlike with fiat currencies like GBP, Euro, and USD ordinary people can control their own funds. You can have an account on the blockchain and if you know the password (aka “private key”) you can spend the money. The blockchain is not controlled by an entity like the Bank of England but by thousands of computers all over the world running trusted code. This greatly reduces systemic risk because even the total failure of a major institution like Bitfinex will have no affect on people who hold their own keys.

Bank runs are an intrinsic risk in the fiat world because banks “borrow short and lend long”. They cannot repay all their depositors on demand and when there is a scare and Joe Public wants his £1000 nest-egg back they can’t find the cash.

In a world of zero interest rates and under-capitalised banks an increasing number of people will starting securely storing their money on the blockchain.

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