How Bitcoin exposes the weaknesses of the banking system

The hierarchy of money becomes visible

In the traditional financial system, the hierarchy of money has always existed, but most people don’t really see it. At the very bottom is the so-called “real” money, i.e. central bank reserves and short-term government debt. Above that come bank deposits, money market funds and various financial obligations that look like money, but are actually just IOUs or promises of payment.

The Bank of England explained back in 2014 that most of the money in circulation is not created by central banks by printing money, but by commercial banks through lending. Despite this, people still get the impression that the money in their account is almost equal to the real money of the central bank.

Bitcoin makes this system much more transparent. Onchain Bitcoin represents the base layer. Above it come ETF shares, balance on exchanges and custodial accounts. At an even higher level are perps contracts, options, and synthetic exposure to the price of Bitcoin. It is enough to open a mempool or onchain analytics tool to see where Bitcoin actually is, how concentrated the market is, and how quickly liquidity disappears when sentiment goes down.

The most interesting part is that crypto very quickly recreated the same habits that exist in the banking system. Much of today’s “exposure to Bitcoin” is not real coins in the self-custody wallet, but custodial IOU models and leverage derivatives. Many people think they own Bitcoin, but in practice, they often only own a claim against a platform or broker.

And this is exactly the same problem of the money hierarchy that is behind almost every major banking crisis.

Source: cointelegraph

Regulation already acknowledges the problem

Regulators have long known that the problem is not just the size of the market, but the way the whole system is complex. Only they rarely say it completely openly.

At the end of 2022, the Basel Committee on Banking Supervision published rules for banks’ exposure to cryptocurrencies. Bitcoin and similar digital assets without actual collateral are placed in a special category with very strict restrictions and high risk assessments. In practice, this means that banks can only hold a small part of the capital in such assets. During 2024 and 2025, the rules were further tightened, especially around stablecoins, their liquidity and the reserves that support them.

It is important to understand that this is not an attack on Bitcoin. In fact, regulators are indirectly acknowledging that the upper echelons of the financial system are naturally volatile. When banks or financial platforms build a large number of short-term liabilities on assets that are volatile or sensitive to a lack of liquidity, problems very quickly come to the surface as soon as the market enters a panic.

At such moments, everyone suddenly tries to exchange their claims for “real” money or basic assets. Everyone wants to withdraw funds immediately and at full value. Then the question is no longer whether a problem will arise, but who will cover the difference when liquidity disappears, the market freezes, and payments slow down. Whether the losses will be borne by users, intermediaries or the state.

Bitcoin portrays this problem much more transparently than the traditional financial system because much of these relationships can be monitored publicly and in real-time via blockchain.

Source: cointelegraph

Banks' bad habits have resurfaced in crypt

Every time a major exchange stops payouts or the lending platform fails, the pattern is practically the same. Promises of fast and secure payouts exist on paper, but the underlying asset layer often doesn’t have enough liquidity to really support it all.

When the market goes into a panic, everyone suddenly tries to move to a safer layer of the system. Traders close futures positions and buy spot Bitcoin. People withdraw coins from exchanges to cold wallets. Capital comes out of risky yield products and returns to dollars or stablecoins.

The same thing happens in the classic financial system.

Bank deposits, whether insured or unsecured, rely on a very small layer of real capital. Funds that look “safe as cash” only stay safe until everyone tries to withdraw them at once. Even government bonds are considered virtually risk-free until the market begins to suspect inflation, debt, or the stability of the state.

Bitcoin’s volatility doesn’t break that comparison. In fact, it makes it even more obvious.

Stablecoins are perhaps the best example of the whole problem because they show the entire hierarchy of money in one product. They are used like dollars and act as digital cash for most people. But legally speaking, a stablecoin is just a claim on reserves that typically consist of government bonds, repo agreements, and bank deposits.

While the market is calm, most people don’t even think about it. The problem arises when a large number of users try to exchange stablecoins for real money at the same time. Then it becomes important how liquid the reserves really are and whether they can be converted into cash immediately without large losses, withdrawal limits or delays.

This is why stablecoins are no longer just a part of the crypto market. They are increasingly functioning as a parallel financial system for payments and transfers of value, competing with banks and card networks in terms of speed, price and availability.

The hierarchy of money is no longer just a theory. It is a system in which millions of people today really keep their money.

Source: cointelegraph

Bitcoin has exposed what banks are hiding

The point of the whole story is not that Bitcoin is perfect and the banks are broken. The real lesson is that any system that is based on promises that users do not understand poses a serious risk, regardless of whether it is a bank, an exchange or a crypto platform.

Banks may continue to view Bitcoin as a threat, seek stricter regulation, and try to maintain control over the system of fees and financial services. But they can also see it as a tool that exposed the weaknesses of the existing model and forced them to be more transparent.

This means that users should be clearly explained what they actually own. Is the “deposit” really money that is always available, is the yield product actually a credit to the platform, and how risky is a tokenized product that is advertised as safe.

It also means that it must be clear in advance who bears the losses first if the institution fails and who is the last to be paid out. Marketing messages can no longer hide the real risk behind the fine print and complicated terms of use.

Bitcoin is unlikely to replace the global banking system. But it is already removing the illusions on which a large part of this system has functioned for years.

The institutions that survive the next major financial crisis will be the ones that accept what Bitcoin has shown very clearly.

If the business model depends on users not understanding what they actually own and how much risk they are taking, the problem is not Bitcoin.

The problem is the institution itself.