Author: Emir J. Phillips, Associate Professor of Finance, Economics and Business Law, University of Missouri-Lincoln Source: Cointelegraph Translation: Shan Ouba, Jinse Finance
Bitcoin has exposed the hidden layers of banks made up of fragile promissory notes, mirroring the crypto industry's own risk claims on the layers of underlying assets.
Bitcoin is more than just a fluctuating candlestick chart on a trading screen. It is a real-time, public stress test, examining how money actually works, and quietly revealing the structural weaknesses that global banks prefer to hide.
In just a few weeks, the US spot Bitcoin ETF has gone from experiencing the worst continuous outflows to strong net inflows, with institutions frequently entering and exiting in tandem with every piece of macro news. Meanwhile, stablecoins processed over $6 trillion in transactions in a single quarter.
Anyone willing to face reality can see that Bitcoin has become an X-ray, revealing a far more ancient and intractable problem. That is: the entire financial system is built on layers of promises. These promises look like cash, but behave completely differently when things go wrong. The Public Monetary Hierarchy: In traditional finance, this hierarchy is simple to describe but difficult to see. At the bottom is high-powered money, namely central bank reserves and short-term sovereign debt. Above that are bank deposits, money market fund shares, and other assets that look like money but are legally just promissory notes. The Bank of England's 2014 paper, "Money Creation in the Modern Economy," clearly states that most of the money in circulation is created by commercial banks through lending, not by central bank printing. Yet depositors are still encouraged to believe that their claims are almost equivalent to base money. Bitcoin makes this hierarchy visible in real time. On-chain Bitcoin is the bottom layer. Above that are ETF shares, exchange balances, and custodian accounts. Above that are perpetual contracts, options, and synthetic asset exposures. A mempool watcher or on-chain analytics dashboard can clearly show how much Bitcoin each layer holds, how concentrated the funds are, and how quickly liquidity evaporates when sentiment reverses. A disturbing fact is that the crypto industry is allowing bad banking practices to repeat themselves at an even faster pace. Today, most “Bitcoin exposures” are not self-custodied assets, but rather custodial promissory notes and leveraged derivatives. Users believe they are holding Bitcoin, but they are actually holding claims on intermediaries who are often interdependent on each other's balance sheets. This is not unique to Bitcoin. This is the exact same monetary hierarchy problem behind every major banking crisis. Regulators have long tacitly acknowledged the problem. They've known for a long time that the risk lies in structure, not just size. They just rarely say it outright. In December 2022, the Basel Committee on Banking Supervision released prudential regulatory standards for banks' crypto assets, classifying uncollateralized crypto assets like Bitcoin into a conservative "Group 2," effectively limiting banks' holdings to around 2% of Tier 1 capital and imposing punitive risk weights. In 2024-2025, the committee further tightened the framework, imposing stricter conditions on truly highly liquid, fully collateralized stablecoins. This isn't a moral judgment of Bitcoin, but rather a quiet but clear acknowledgment by regulators: underlying currencies are inherently vulnerable. When banks or quasi-banking platforms stack short-term, run-promises on volatile or liquidity-sensitive collateral, the collapse pattern is not mysterious. Under pressure, everyone will simultaneously try to withdraw from the lower levels, demanding immediate redemption at face value. The only crucial issue then becomes loss distribution: when "instantly redeemable" claims collide with thin market depth, widening discounts, and settlement bottlenecks, who will cover the shortfall—the customers, intermediaries, or the public guarantor? Bitcoin exposes this distribution problem on-chain in real-time and publicly. The bad habits of banks are being repeated in the crypto world. Whenever large exchanges suspend withdrawals or lending platforms collapse, the pattern is exactly the same: upper-level promises seem to guarantee instant redemption, but the underlying assets are scarce and slow to react. When the shock comes, everyone rushes to the bottom: from perpetual contracts to spot trading, from exchange balances to cold wallets, from high-risk, high-return products back to the US dollar. The same is true for the fiat currency world. Depositary and non-depositary funds are supported by only a thin layer of equity. "Cash-like" funds only resemble cash when there's no run on them. Sovereign bonds are considered risk-free until fiscal or inflationary panics suddenly reveal who is truly responsible. Bitcoin's volatility hasn't weakened this analogy; it has sharpened it. Stablecoins are an even clearer mirror because they compress the same "monetary hierarchy" into a single product. They are priced and used like the US dollar, and function like digital cash in everyday life. Legally, these are second-tier redemption claims on the reserve pool—usually government bonds, repurchase agreements, and bank deposits—and their true liquidity is only truly tested when a large number of holders exit simultaneously. In calm markets, this structure is invisible; under pressure, it determines life or death. Because redemption at face value depends entirely on whether the reserve assets can be realized immediately, without discount, without restrictions, and without settlement bottlenecks. This is why this shadow dollar is no longer a peripheral component of crypto: it is increasingly becoming a parallel payment and clearing track, competing with banks and card organizations in speed, cost, and coverage. This tier is no longer theoretical. It is where people actually store their funds. The X-ray diagnosis: For banks, the lesson is not that Bitcoin is pure and they are corrupt. The lesson is: a system built on misunderstood promises is systemic risk, regardless of what's on top of it. Banks can continue to view Bitcoin as an external threat, lobbying for punitive regulation and extracting fees from layers they can no longer fully control. Alternatively, they can use Bitcoin as a diagnostic tool, redesigning their commitment systems with the brutal clarity of blockchain. This means: clearly communicating to customers whether a "deposit," a "yield product," or a "tokenized debt" is readily available cash, a loan to an institution that might be frozen in a crisis, or a leveraged bet on market risk. It means: clearly stating the order of repayment in the event of institutional bankruptcy. It means: aligning all slogans, banners, and pop-ups with legal reality, rather than hiding layers in vague brand packaging and fine print. Bitcoin will not replace global banking. But it is already tearing apart the comforting narratives banks have woven for themselves. The institutions that survive the next cycle are those that accept this X-ray diagnosis. If a business model relies on customers not understanding that they hold layers of nested debt, then the risk is not with Bitcoin. The risk lies with the bank itself.
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