Do You Trust Crypto Exchanges and Banks?

Trust underpins all human interaction. It is also the foundation of every financial relationship you have ever entered into — with your bank, your broker, your exchange. The question worth asking is not whether you trust these institutions, but whether you understand what you are actually trusting them with, and what happens when that trust is misplaced.

The Bank’s Gambit

When you deposit money at a bank, you believe it is yours. Legally, it is not. You have become an unsecured creditor of the bank. The bank lends your deposit out, leverages it, and earns returns on capital that is notionally yours. This is fractional reserve banking: your deposit is a promise, not a possession.

The Silicon Valley Bank collapse illustrated what this means in practice. When too many depositors wanted their money simultaneously, the vaults were effectively empty. The system functions on the assumption that not everyone will ask at once. When they do, the assumption fails.

Over a 50 to 60-year period — well within a single lifetime — rough estimates put the probability of any given bank becoming insolvent at around 28%. The consequences of that event for an individual’s wealth are rarely proportionate or swift.

The Custody Problem on Exchanges

The situation on crypto exchanges carries its own version of the same risk, with less regulatory backstop.

When you hold Bitcoin on an exchange like Binance or Coinbase, you do not hold Bitcoin. You hold a claim on Bitcoin. The exchange holds the private keys. The principle is simple and the consequences of forgetting it are severe:

Not your keys, not your coins.

The legal fine print you accepted during onboarding determines whether you hold any enforceable claim at all. History offers a reasonable guide to what recovery looks like when exchanges fail:

• Mt. Gox — a decade after the hack, creditors were estimated to recover approximately 16–23 cents on the dollar.
• QuadrigaCX (2019) — creditors recovered an estimated 13 cents on the dollar. The CEO was the sole holder of private keys controlling $190 million in customer funds. He died before disclosing them.
• FTX (2022) — proceedings ongoing; initial estimates suggest creditors may recover 10–20 cents on the dollar.

These are not edge cases. They are the documented outcomes of third-party custody when the third party fails.

Moral Hazard

Both banks and exchanges are susceptible to the same structural problem: moral hazard. They take risks knowing they may not bear the full consequences of those risks. Banks over-leverage, partly because deposit insurance and government backstops reduce the cost of failure. Exchanges grow lax with security, partly because users rarely leave until something goes wrong.

The 2008 financial crisis is the most visible example of this dynamic at scale. Banks gambled, lost, and were rescued by taxpayers. The incentive structure that produced the crisis was largely left intact.

What This Means for Your Wealth

In both cases — money in a bank, Bitcoin on an exchange — your assets are part of a system operating beyond your direct control. The risk is not hypothetical; it is structural and recurring.

The practical response is not to avoid all institutions, but to avoid concentrating exposure in any single one. Diversification across custodians — including self-custody for Bitcoin — reduces the impact of any single point of failure. Self-custody means holding your own private keys: your Bitcoin is then not a claim on an exchange’s promise, but a direct and exclusive possession.

The question is not simply where to keep your wealth. It is how much control you are prepared to surrender, and to whom.

This is not financial advice. Consult a qualified financial adviser and conduct your own research before making any decisions about custody or asset allocation.