Hold funds on-chain and offset bank counterparty risk
In recent years, we've seen a number of banks fail in the United States, leaving their customers in the lurch. The most recent examples were the failures of California-based Silicon Valley Bank, Signature Bank and First Republic Bank, all of which were seized by regulators earlier this year. Such failures can have a devastating impact on businesses, particularly those that rely on banks to manage their payroll.
For businesses using traditional banks to do payroll, a bank failure can make it difficult or impossible to access funds. This creates significant risks to paying contractors or employees, as it can take weeks or even months for funds to be released.
Most businesses mitigate this risk by diversifying their banking relationships. But a new option for diversification has emerged with the advent of decentralized technology: Holding funds on-chain in a multi signature wallet or treasury on a blockchain. This approach involves holding stable tokens in a crypto wallet instead of a traditional bank account.
Holding funds on-chain provides direct ownership and control of balances. Multi- signature wallets are secured by the strength of blockchains. Direct ownership and control of assets does bring its own risks, which means that people using crypto wallets with decentralized apps instead of banks should be well-versed in the basics of decentralized finance. The benefit to wallets and cryptocurrencies is in their decentralized structure. There is no central point of failure that could lead to a 'frozen' bank account.
Another advantage of holding funds on-chain is that it provides greater/real-time transparency. The core purpose of blockchains is consensus in ledger transactions, thus audit is a main feature. Blockchains continuously update their 'state' of the ledger and people with on-chain treasuries can monitor their balances in real-time. Traditional banking has less readily available audit and transparency.
Finally, holding funds on-chain can provide greater flexibility and accessibility. With traditional banking, businesses may be limited by the banking hours and services offered by their bank. The blockchain is 24/7 around the world.
Other than operational challenges using multi-signature wallets, businesses must consider what holding cryptocurrencies and stable tokens can mean. Some cryptocurrencies can be volatile and stable tokens need to be well researched before they are used. Additionally, businesses need to plan and understand how to use additional infrastructure, such as cold storage, to ensure the security of their funds.
The recent bank failures should serve as a reminder of the importance of diversifying banking risks and these considerations should include some crypto balance holdings. Holding funds on-chain can be a powerful diversifier for businesses. By exploring this option, businesses can ensure they are better prepared for future banking disruptions.