I would like us to take this opportunity to recognize that fractional reserve banking where depositor funds are used (with leverage) to make speculative bets (on mortgage backed securities or even T-bill interest rates) is a fundamentally unsound model.
I would much prefer a model where I have the option to store my funds in a full-reserve bank and would happily pay for the service.
As for self-custody, it is a skill like any other and one that I think more people should learn. Self-custody is fundamentally no more difficult than say building a sound backup strategy (3 copies minimum, stored in at least two formats with at least one stored offsite) There are ample tutorials on the internet and I hope more people recognize that counter-party risk is real, whether it be fiat or crypto.
I’d hope we don’t have to find out. Regardless of who holds the bag, it’ll be bad. (In an ideal world, depositors will be depositing in banks with finances matching their risk profile, but I digress.)
How would crypto make this better though? Yes, self-custody eliminates the counterparty risk, but just like with USD, self-custody is just not practical for many people. Many people choose to hold their crypto in exchanges (because of convenience) or lenders (i.e., equivalent to banks, because of yields.) So doing results in similar or higher counterparty risks.
If we abolished fiat and moved to BTC, a financial system will arise on top of it which will likely closely mirror the USD financial system (actually, it already does now). If that happens, the counterparty risk for depositors remains.
I’m all for crypto, but I think it’s naïve to think that just because self-custody is a possibility, counterparty risk will go away.
If you have a significant amount of USD, you can mitigate the risk of your bank failing on you by holding physical cash or by holding T bills.