There is nothing inherently wrong with banks lending out your deposits. This system is how a majority of new businesses are funded and how the economy expands. There are a mountain of regulations that banks have to keep up with and the reason why FDIC insurance exists. Investors entering the crypto space willingly rejected these regulations and are now finding out their purpose the hard way.
It's similar to the situation with credit cards. There is a whole industry related to working around the problem of constantly disclosing the secrets, such as refunding stolen funds.
Likewise we have had to rely on banks to control digital money since we did not have a good alternative. And now there are many regulations and compliance officers etc. dedicated to preventing people from cheating, stealing, or irresponsibly using customer funds.
But at the core level the problem is that these the bank ledgers are secret, difficult to verify or connect together for tracing purposes. Cryptocurrency means using math and computer science to solve these types of problems in a holistic way.
Like everything else, people have abused this technology (such as using it to sell services that are antithetical to the core concept). But that doesn't mean they aren't important advances.
Yeah especially after 2008. I heard a joke from someone who works at a big bank that after 2008 there are 2 compliance people for every one banker. People in finance like to make fun of the "back office" but they seem to be main reason the bank stays solvent.
> There is nothing inherently wrong with banks lending out your deposits.
There wouldn't be anything inherently wrong with it 1) if they didn't do it by default 2) if banks informed their customers appropriately, including the risk in doing that (most people don't know what banks do with their funds) and especially 3) if it wouldn't be forced, i.e. if they would let customers choose to keep their funds segregated if they are not willing to take the inherent risk in lending and/or the bank mismanaging their funds (e.g. having the option to have both segregated and normal checking/savings accounts or whatever), so that customers would never be exposed to losing whatever amount they didn't want to (including anything above the FDIC insured amount).
But sure, allow customers to lend their money and expand the economy if they want to. With an appropriate reward for the risk, not a laughable 0% interest rate, which almost nobody would ever take willingly. In fact, the 0% interest rate, or anything below or close to the inflation rate, is a clue which indicates that what they're doing to their customers is wrong and that the customers aren't choosing to take that risk knowingly and voluntarily.
> There are a mountain of regulations that banks have to keep up with and the reason why FDIC insurance exists
You say that like it's a good thing. It's massively inefficient and both "a mountain of regulations" and FDIC insurance are inherently unfair (for several reasons) and have many unintended (negative) consequences.
And it doesn't even actually fix the problem, it just makes it less likely to occur (for starters, because there ends up being much less competition than there would be otherwise -- less banks, less bank failures) but when it occurs, it's an even bigger problem. Which means it also gives a false sense of security.
