The Bank Run: Impact on Traditional Markets and Cryptocurrency Platforms

What is a bank run?

A bank run represents a financial crisis situation that occurs when a large number of customers of a bank attempt to withdraw their deposits simultaneously due to concerns about the solvency or liquidity of the institution. This phenomenon, known in English as "bank run" or "bank panic", is characterized by a climate of widespread distrust that can lead to severe consequences for financial institutions.

When depositors lose confidence in the stability of a bank, a domino effect occurs: the more people withdraw their funds, the less liquidity the bank has, which increases the perception of risk and leads to more withdrawals. This situation can quickly lead to a liquidity crisis, as banks do not keep 100% of deposits in cash available for immediate withdrawals.

Triggers of a Bank Run

Bank runs can be triggered by various factors that affect depositors' confidence:

• Systemic economic crises that create uncertainty throughout the financial system
• Severe inflationary processes that deteriorate the value of savings
• Political instability that raises doubts about the security of the banking system
• Loss of trust in specific financial institutions or in the banking sector in general
• Financial problems revealed in private banking entities

Preventive measures in the traditional banking system

To prevent and mitigate bank runs, financial authorities and banks implement various strategies:

• Liquidity policies implemented by central banks to ensure that financial institutions have sufficient resources.
• Deposit insurance systems that protect total or partially the savings of depositors up to certain amounts
• Transparency protocols that require banks to disclose information about their financial health
• Prudential regulations that establish minimum capital and liquidity requirements for institutions

These measures aim to reduce the likelihood of bank runs and minimize their impact when they occur, protecting both depositors and the stability of the financial system as a whole.

Bank runs in the cryptocurrency ecosystem

The concept of a bank run is also applicable to the world of cryptocurrencies, particularly in centralized exchange platforms that hold the assets of their users. Despite technological differences, the dynamics are similar: when distrust arises about the solvency of a platform, users try to withdraw their funds en masse.

The case of FTX represents a paradigmatic example. After financial irregularities were revealed at Alameda Research (, a company affiliated with FTX), trust in the platform quickly collapsed. In just 72 hours, users attempted to withdraw more than 6 billion dollars, which triggered a liquidity crisis that forced the suspension of withdrawals and eventually led to the collapse of the platform.

Specific features of trading on cryptocurrency platforms

Cryptocurrency platform runs have particular characteristics that differentiate them from traditional banking.

1. Lack of regulatory backing: Unlike traditional banks, many cryptocurrency platforms operate in less developed regulatory frameworks, without access to lenders of last resort like central banks.

2. Lack of guarantee systems: The widespread absence of deposit insurance significantly increases the risk for users in the event of a platform collapse.

3. Higher propagation speed: The digital nature and interconnection of the crypto market allow negative news to spread quickly, accelerating potential runs.

4. Liquidity challenges: Extreme fluctuations in the prices of crypto assets can complicate the liquidity management of platforms during periods of stress.

Scenarios that can trigger runs on cryptocurrency platforms

There are various factors that can trigger a run on cryptocurrency exchange platforms:

1. Concerns about security: When doubts arise about protection measures or security vulnerabilities occur, users may attempt to withdraw their funds en masse to protect themselves.

2. Liquidity issues: During periods of high volatility or sudden changes in asset prices, platforms may face difficulties in meeting all simultaneous withdrawal requests.

3. Fear of insolvency: Rumors or signs of financial weakness in a platform can trigger massive precautionary withdrawals by users seeking to safeguard their assets.

4. Crisis of trust: Transparency issues, revealed malpractice, or scandals related to the platform's managers can quickly erode user trust.

How to Assess the Strength of a Trading Platform

To minimize risks associated with potential runs, users of cryptocurrency platforms may consider these factors when selecting where to trade:

• Transparency in reserves: Platforms that regularly publish audits of reserves (Proof of Reserves) demonstrate greater transparency regarding the availability of the custodial assets.

• Operating history: Platforms with a stable track record across multiple market cycles tend to represent lower risk than new entrants without a proven history.

• Risk Management Practices: It is important to assess how the platform segregates user funds, what security protocols it implements, and whether it maintains emergency funds.

• Clear corporate structure: A transparent organizational structure with defined responsibilities usually indicates better operational standards.

Lessons from the FTX case for the ecosystem

The collapse of FTX perfectly illustrates the inherent risks of runs in the cryptocurrency sector. This case revealed fundamental issues such as:

• The lack of clear separation between client funds and the company's operational funds
• Risky lending practices and collateral use among related entities
• Deficiencies in governance and internal oversight systems
• Insufficient or unclear financial information for users

This event highlighted the importance of exchange platforms maintaining adequate reserves, implementing rigorous security protocols, and offering greater transparency to maintain user trust and prevent run scenarios.

Considerations for Cryptocurrency Platform Users

To protect themselves against possible bank run scenarios, users of cryptocurrency exchange platforms should consider:

• Diversify your assets across different platforms to reduce concentration risk
• Use personal wallets (non-custodial wallets) to store crypto assets for the long term
• Stay informed about the financial and operational health of the platforms used
• Pay attention to early signs of problems such as processing delays, sudden changes in policies, or persistent rumors about financial issues.

Cryptocurrency platform runs represent a significant risk that requires attention from both users and platform operators. Implementing better practices of transparency, security, and risk management is essential to strengthen the trust and stability of the ecosystem.