The crypto bear market has hit some companies hard in the last few months. Babel Finance lost over $760 million and is reportedly considering launching a crypto-backed coin to repay creditors. Celsius and Three Arrows Capital are both bankrupt, and things aren't so stable in the world of TradFi either, with Silicon Valley Bank and Silvergate's high-profile collapses causing a contagion that led to concerns about other institutions, including Credit Suisse, which is now under investigation by Swiss prosecutors.
If we've learned anything from the last few months, reputation matters, and sentiment can change quickly. This isn't the first time in living memory that we've seen bank runs. It's not even the first time in a generation, but the bank runs of the 2000s were very different. Things happened more slowly, and because smartphones and social media weren't as prevalent, information (and disinformation) spread more slowly.
Prior to its collapse, Silicon Valley Bank was considered to be a well-capitalized bank. That said, the bank made some bad decisions in terms of structuring its balance sheet to manage the risk of inflation and interest rate rises. In order to address the growing problem of increasing cash outflows, resulting from its predominantly early-stage equity-funded clients' burning cash while experiencing a squeeze on the availability of new funding from VCs, the bank had to sell some loss making held-to-maturity fixed-income investments. Incurring these losses raised concerns over the amount of short term capital available to meet its growing client cash outflows, and a vicious circle started of dropping confidence, increasing fear, increasing capital outflows, and the consequent need to sell more loss making held-to-maturity investments. Obviously, other factors also contributed to its collapse, however, a significant portion of the blame can be attributed to the very venture capitalists that SVB had served for four decades. Over a 48-hour period, they collectively latched on to some bad news, panicked at the level of uninsured deposits many of them had in the bank, and started a bank run that led to the bank's demise.
This Isn't a Crisis, It's Sentiment Contagion#
Today, anyone can trade and invest, and anyone can share their opinions online. The gamification of financial markets and the rise of TikTok and Instagram "financial influencers" have created the perfect environment to amplify troubles into a media storm of panic and irrational market behavior.
Influencers take a comment from Nouriel Roubini, known to those in the economics world as Dr. Doom, warning about the contagion from US banks having the potential to spread globally, and run with that. They create a self-fulfilling prophecy where even banks that are performing well suddenly see their share prices fall due to fear.
Bad News Gets More Clicks than Good News#
Whether the crisis is real or not, it's happening, and it's playing out for the first time via platforms such as Twitter, where bad news and conspiracy theories generate more engagement than common sense and facts. This puts TradFi, CeFi, and DeFi project leaders in a difficult position.
"Funds are SAFU" is a meme to many in the DeFi world, and with good reason. When a centralized exchange or DeFi project denies the existence of problems, it's often twisted by community members as a sign that trouble is brewing.
So what can project marketing teams and community managers do to combat this issue?
Even some of the biggest brands in the crypto and DeFi spaces are struggling to answer that question. Binance has lost banking partners in many parts of the world, and is facing a lawsuit from the CFTC. As one of the biggest players in the crypto space, Binance is relatively well-equipped to weather this kind of storm, but smaller projects may not have that luxury.
Tether is under pressure, too. The death of algorithmic stablecoins such as Terra Luna, and the recent de-pegging of USDC have brought back questions about whether the stablecoin is truly backed, or whether it's a ticking time bomb that could bring down virtually the entire crypto space.
Sentiment drives so much in the world of finance. That's why it's so important for brand owners to show their clients that they take resilience and financial stability seriously and that they have measures in place to protect their users and customers.
What Crisis Management Tells Us about a Resilient Brand#
Large and small brands alike need to invest in both resilience and crisis management if they're to successfully maintain the confidence of their clients during these challenging times. No matter how strong your belief in your project and its security is, simply having faith or confidence that a crisis won't happen is not enough.
There will always be events that are out of your control. Wars, extreme weather, and the lingering effects of lockdowns have combined to make the global economy fragile, and even the strongest companies can be victims of those challenges.
A 2018 Deloitte report that still holds true today indicates that many companies are experiencing a "crisis of confidence." Business leaders are often:
- Under-equipped to deal with a crisis on an individual level
- Leading organizations that are under-prepared to deal with a crisis
- Overconfident in their crisis management capabilities.
These three issues combine to put organizations in a difficult position. When things go wrong, they're unexpected, and the organization isn't equipped to respond confidently or quickly.
Do you know how your organization would respond if your users' funds were stolen or burned in the event of a security breach? If you don't have a full disaster recovery and business continuity plan, now is a good time to make one.
DeFi insurance can form a significant part of that plan and can also be a useful tool for showing your customers that you are a responsible and resilient organization. Savvy traders and investors are well aware that even the most reputable organizations can encounter problems. They know that what matters isn't the conviction with which a company promises it’s well run, audited, and secure. Rather, the important thing is the checks, balances, and backups that are in place to ensure that even if the worst happens, the user's funds will be protected.
Of course, insurance is just one aspect of your crisis preparedness. Open, honest communication and robust security, backup, and audit policies are essential. The companies that have those things in place are the ones that will be most likely to make it through the challenges of the next few years.
