YOUR DEPOSIT IS A LOAN — THE STATUTE PUTS IT SECOND IN LINE

The document is a bitcoin.com interview, out Sunday morning, with Graham Stone, the director of a new documentary on the 2013 Cyprus banking crisis. His first claim: “The most critical realization is that when you hand your cash to a bank, it stops being your legal property.” True. A deposit is a loan to the bank. The balance on your statement is what the bank owes you, not what you own.

His second claim is where the record parts from him: “You become an unsecured creditor. You’ve essentially given the bank an uncollateralized loan, and on paper, you’re sitting at the back of the line behind derivative counterparties and secured lenders if things go sideways.”

Read the line. In the United States it is written in 12 U.S.C. § 1821(d)(11), the depositor preference statute, in force since 1993. When the FDIC liquidates a bank, the proceeds after secured claims are paid in this order:

(i) Administrative expenses of the receiver. (ii) Any deposit liability of the institution. (iii) Any other general or senior liability of the institution.

Second in line, behind only the receiver’s own expenses. Every other unsecured creditor of the bank stands behind the depositor, insured or not. Secured lenders come first because they hold collateral, which is what secured means. The back of the line is the shareholders, then the holding company’s creditors.

Europe wrote it the other way and reached the same place. Article 44(2) of the resolution directive Stone cites, the BRRD, lists what resolution authorities shall not write down, and the first item is covered deposits. That is the law the Cyprus haircut produced, and we read it for last Sunday’s piece.

Cyprus itself: the interview says Cypriots lost “up to 50% of savings.” The number was 47.5 percent of everything above 100,000 euros at one bank, Bank of Cyprus, converted into that bank’s stock. Everything under 100,000 euros was moved intact. The insured depositor kept every euro and lost two years to capital controls. Both halves of that sentence matter, and the interview prints one.

What the interview leaves out entirely is deposit insurance. The word does not appear. No holder of an insured deposit in the United States has lost a dollar of principal since 1933, and in March 2023 the uninsured were made whole too, by three signatures on a Sunday. That is the mechanism, and it cuts the other way from the one Stone describes: the guarantee is on the number, and it keeps getting stronger.

So take the true half and the omitted half together. Your deposit is a claim. The claim ranks second by statute and is insured to the limit. What nobody guarantees is what the number buys, and that is the part a 4 percent account loses every year the things you pay for rise faster.

Stone’s closing line holds without the scare: “If you don’t control the underlying asset—whether that’s physical cash, gold, or the private keys to your Bitcoin—you are operating on borrowed permission.” Strategy’s own investor guide, page 16, puts the same thing without adjectives: self-custody is control without a financial counterparty. A deposit has a counterparty and a place in a line. The coin has neither.

At the time of this writing, bitcoin was $76,702 at 9:40 AM ET on Crypto.com.