The problem is that even your "sane" system will consistently fail to be appropriately liquid, even when compared to traditional finance. Exchanges are a liability being thrown into the mix, and since the cold/hot funds aren't regulated they could frankly be spent on anything. Their cold wallet could be tied up in the speculation market or being leveraged against lenders. Every one of these exchanges has every incentive to operate against the user's wishes, at the end of the day.

Exchanges simply don't work. The comparison between them and banks ignores the surrounding regulation and guarantees that banks are obligated to issue you. Are my FTX holdings FDIC insured?