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Tom Grady| Fort Myers News-Press

With the recent spate of bank failures from SVB to Silvergate and most recently Credit Suisse Signature Bank there has been a lot of speculation and teeth-gnashing about how such a thing could happen in a modern economy.

Whether it was their borrowing or lending patterns, economic flux, over-reliance on bonds or investing in high-risk high-tech startups, there is one common element in each of these failures and that has to do with their reckless involvement with cryptocurrency.

Analysts have suggested that Silvergates balance sheet was loaded up with cryptocurrency-related assets and liabilities, while Signature Bank had deposits of crypto companies of up to a fifth of its total.

How could this have happened?

Lets start with the basics. A cryptocurrency is a medium of exchange, like actual money, that exists only in the digital world. At some level this should not be a problem as so much of our modern monetary system happens in the abstract online digital world. Your monthly salary payments are sent directly into your account (for example), you pay bills, put money into retirement or savings accounts, pay off loans and conduct most banking transactions without ever touching actual physical currency. For most readers, paying your utility bills or even for groceries with actual dollar bills is a thing of the past.

But where cryptocurrency is different is that although required to be registered as securities, its not. Also, it is not backed by the good faith and credit of any government. For those libertarians and criminals, this is the utopia you had wished for. For those who are watching their life savings or business investments evaporate, this is the dystopia you had feared.

Of course, with those funds wrapped into other funds in these banking failures, the U.S. government and the Federal Reserve are stepping in where needed so in truth, this wont be seen as a true libertarian experiment when the dust settles.

But heres the rub. Many of these crypto exchanges promoted themselves as legal and safe investments with many implying they were indeed backed by governments or insurers when in truth, they were not. This is where those of us who support free-market economics recognize the failure, and that failure is, simply put, disinformation run amok.

We now have learned that the above banks had relied on cryptocurrencies and related companies, to a fault. Additionally, one could make the case that in the wake of the spectacular fraud of FTX Trading Ltd. (a cryptocurrency exchange and hedge fund) in November, and the resulting industry-wide collapse that followed, most certainly served as a catalyst for the runs on these banks.

And what about those investors who lost tens of thousands in crytpo exchanges but werent so lucky to have their dollars backed by the federal government?

For them, their only recourse is a private cause of action against these exchanges. This is vital information for all of those who were promised that crypto was registered and safe (and were lured in that promise with the misinformation that these funds were indeed secure) but ended up with nothing but losses, there is recourse. And if allowed to be carried out, I for one would conclude that we dont need further government regulations or new laws or bureaucracies to restrict innovation. The laws we have on the books are indeed adequate, we just need to put them to work and we need to hold those wrongdoers accountable in a court of law and the laws, as written, will serve justice to the wrongdoers while allowing smart, ethical investors to continue exploring free-market concepts.

My advice to those who were deceived is to seek out legal counsel, explore your options and take action to hold these wrongdoers accountable and hopefully recover some of your lost savings.

Former State Rep. Tom Grady is a former commissioner, Florida Office of Financial Regulation; former member, SBA Investment Advisory Council; chief investment officer, PureAssets Management Company; former member, Securities Industry Conference on Arbitration (SICA) and regularly serves as an expert witness on this subject for the state attorney in criminal prosecutions.

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Bank failures and cryptocurrencies - News-Press