Did The Government Start A Global Financial Crisis In An Attempt To Destroy Crypto?
six weeks later, operation chokepoint 2.0 has brought crypto to its knees… along with america’s entire financial system
Six weeks ago, Pirate Wires published Nic Carter’s explosive Operation Chokepoint 2.0, laying out the case that the Biden Administration was quietly attempting to ban crypto. A month later, the US financial system was thrust into chaos after a series of historic bank failures, most notable among them Silicon Valley Bank. But the failures actually began a couple days earlier, after crypto-friendly Silvergate was targeted by the government. By the end of the following weekend the last-remaining crypto-friendly bank, Signature, was shut down under circumstances still unclear, and for some reason largely unreported.
In a bombshell new feature for Pirate Wires, Nic Carter returns: today, the entire global financial system teeters on the brink of a disaster created by the Fed.
A bank run that began with a small Californian regional bank has now escalated into a worldwide crisis. As a response to the failures of Silvergate, Silicon Valley Bank, and Signature, the Federal Reserve prepared a veritable bazooka of new funding for financial institutions and reversed its plans to contract the money supply. Switzerland is busy negotiating the merger of two of its largest banking institutions, UBS and Credit Suisse. This represents the biggest challenge to financial stability since the Great Financial Crisis in ‘08 and a sea change in the structure of US banking. Attention has rightly been focused on the prospect of further runs and the knock-on effects of Fed policy on banking institutions.
But lost amidst the chaos is another subplot: the escalating crackdown by the Federal government against a wholly legal US industry. A month ago, I warned that banks dealing with crypto clients were facing a concerted effort on the part of regulators and supervisors to redline the entire crypto space. What has happened since was utterly shocking. The two most crypto-focused banks, Silvergate and Signature, were forced into liquidation and receivership, respectively. The established narrative is that they made “bad bets” and lost, or that they couldn’t handle flighty depositors in the form of tech and crypto startups.
But there’s an alternative version of events being pieced together that is far more sinister — and convincing. It appears that these banks, especially Signature, were the victims of an opportunistic campaign to decapitate banks serving the crypto industry. Not only was the bank run opportunistically exploited by regulators to shut down Signature, but it may even trace its origins to Choke Point 2.0. Did the Biden Administration actually instigate the now-global bank run as part of a grievance campaign against the crypto space? If so, this represents a colossal scandal, and one that the Biden administration must be made to answer for.
The preponderance of public evidence suggests that Silvergate and Signature didn’t commit suicide — they were executed.
In January 2023, it became clear that a new chapter had opened up in the Biden admin’s war on crypto. Some in the crypto space noticed highly coordinated activity between the White House, financial regulators, and the Fed, aimed at dissuading banks from dealing with crypto clients, making it far more difficult for the industry to operate. This is problematic because it represented an attempted seizure of power far beyond what is normally reserved for the executive branch.
These warnings were echoed by members of Congress like Sen. Hagerty, Rep. Davidson, and Whip Emmer. Subsequent efforts were made in a House hearing to determine whether the regulatory harassment is legal.
It wasn’t just banking regulators either. In the last month, regulatory attempts to kneecap the crypto industry in the US escalated dramatically:
The SEC announced a lawsuit against the crypto infrastructure company Paxos for issuing the BUSD stablecoin.
Crypto exchange Kraken settled with the SEC for offering a staking product.
SEC Chair Gensler openly labeled every cryptoasset other than Bitcoin a security.
The Senate Committee on Environment and Public Works held a hearing lambasting Bitcoin for its environmental footprint.
The Biden admin proposed a bill that singles out crypto miners for onerous tax treatment.
The NY Attorney General declared Ethereum, the second-largest cryptoasset, a security.
The SEC continued its anti-consumer protection efforts by doubling down on their attempts to block a spot Bitcoin ETF in court as well as trying to stop Binance US from buying the assets of the bankrupt Voyager.
The OCC let crypto bank Protego’s application for a national trust charter expire without approval.
The SEC sent Coinbase a Wells Notice, indicating its intent to bring enforcement actions against them for a variety of their business lines.
Most worryingly though, the situation for existing crypto-facing banks has gone from precarious to critical. In January, we already knew that banks were effectively barred from issuing stablecoins on a public blockchain, from holding cryptoassets directly, and were heavily discouraged from servicing crypto clients. We know now that regulators had verbally guided crypto-friendly banks in November to reduce their exposure to crypto firms to 15 percent of deposits, even though this was never made explicit in written policy (in practice, this means maintaining a ratio below 10 percent, to accommodate fluctuations in deposits).
Any bank foolhardy enough to onboard crypto-focused firms would find itself buried in a mountain of paperwork and faced with unpleasant interrogations from regulators. Additionally, the Fed made it abundantly clear that new crypto-focused bank charters like that of Custodia (a fully reserved model, immune to bank runs!) would be denied, which is exactly what happened at the end of January. Banking crypto firms wasn’t prohibited, just rendered extremely expensive and reputationally risky.
Over the last two weeks however, a bank run — initially encouraged and celebrated by progressives members of Congress — escalated into a full-blown banking crisis, forcing the Fed to step in and guarantee deposits at the banks in crisis. Once the dust had cleared, three banks were no more: Silvergate, Silicon Valley Bank (SVB), and Signature. Silvergate announced on March 8th its intention to wind down its operations in an orderly manner. That same week, SVB and Signature were put into FDIC receivership by the California Department of Financial Protection and Innovation and the New York Department of Financial Services (NYDFS), respectively, on Sunday night. The Fed stepped in, guaranteeing deposits at the imperiled banks, and creating a facility whereby extant banks could borrow against assets at par that were trading at discounted valuations. This largely halted the slide, although I do expect that we will see a slow bleed out of community banks and significant consolidation in the financial sector over the next year. There’s no reason any longer to place deposits in the hands of a smaller community bank that is vulnerable to runs, especially given Janet Yellen’s unsettling admission that the Treasury would only step in to support large, ‘systemic’ institutions. Now, depositors are fleeing to the largest banking institutions, money market funds, or simply holding Treasuries directly. Whether intentional or not, these policies will cause smaller banks to die off, making credit more scarce, reducing competitiveness in the bank sector, and making it easier to set policy by marshaling a few large banks for political ends.
It's worth briefly examining why some of these banks were distressed in the first place. This has been ably covered elsewhere, but the ultimate cause is simple enough to diagnose. The US government has been engaged in massive deficit spending in recent years, particularly in the context of Covid and the stopgap measures such as the CARES act, rivaling spending levels reached during WWII. This fiscal impulse predictably manifested as the highest inflation since the 80s, requiring the Fed to mechanically raise rates — extraordinarily rapidly — in order to bring inflation back down in line with its mandate. Mathematically, high rates cause bonds to depreciate, especially longer-dated ones. As a result, the performance of government bond portfolios last year, which serve as the foundational collateral asset of the financial system, was the worst in recorded history. US banks held a lot of these bonds, and collectively suffered $620B in unrealized losses as a consequence.
This became a problem when some of these banks started to suffer outflows, forcing them to lock in these unrealized losses. Some of these banks realized their predicament, and as they took measures to raise capital, the market realized that they were impaired, and depositors fled, causing an escalating crisis. Since depositors are unsecured creditors with no upside and high downside, the rational move in a bank run is to pull your funds first and ask later, and this is what happened.
The bank run isn’t worth dwelling on, aside from making the point that catalysts should not be confused with ultimate causes. VCs (correctly) telling their startups to reduce their SVB exposure were not the cause of the SVB run. (Shouting “fire” in a movie theater isn’t morally blameworthy when there really is a fire.) Nor were the “risky bets” made by SVB leadership (their portfolio was completely ordinary, and raised no red flags among their regulators or ratings agencies). ‘Systemic risks introduced by crypto’ certainly weren’t the cause either, as all of the affected banks had survived the 2022 crypto market selloff and were still in business as of Q1 2023. Nor was loosening of Dodd-Frank coverage of regional banks, as the 2022 Federal Reserve stress test’s baseline and “severely adverse scenario” did not contemplate a 25 percent annual drop in the price of long term Treasuries. The ultimate cause of the collapses was not Peter Thiel, David Sacks, or a loosening of Dodd-Frank, but rather the massive spending spree of the Trump and Biden admins and the resultant inflation, which forced the Fed to hike rates dramatically.
Part I: Did Silvergate Die By Suicide Or Murder?
After suffering irrecoverable setbacks, crypto-friendly bank Silvergate announced in early March its intent to wind down its operations in an orderly manner. As we know, the bank’s announcement called attention to the much broader and widespread problem of losses in bank held-to-maturity portfolios, catalyzing a massive bank run which brought down SVB and Signature (more on them later), and spread to Europe, dooming megabanks like Credit Suisse. But let’s dwell on Silvergate for a bit.
Plenty of analysts have already explained in detail how exactly Silvergate met its demise. In short, it accepted deposits from crypto firms, plowed those deposits into bonds with long maturities when rates were low, suffered a loss on those bonds when rates rose, and were forced to realize those losses when their crypto clients demanded their money back, all at once. The combination of rising rates and the selloff in crypto — which caused clients to withdraw en masse — was too much to bear. And this is a perfectly suitable mechanical explanation of how Silvergate was forced to close down and voluntarily liquidate.
But there’s also a political subtext here. Most banks are now sitting on mark-to-market losses in their bond portfolios, but they’re not facing runs from their clients. And indeed, Silvergate managed to survive a 70 percent redemption of client assets over the course of 2022 before they were wiped out in 2023. Silvergate met its end because — well after the crypto credit crisis of ‘22 had concluded — its remaining depositors were cajoled and bullied into withdrawing their funds.
Depositors don’t just desert banks abruptly. They need a good reason to. In this case, a combination of targeted regulatory pressure and political bullying did the trick. Here’s what happened.
First, Silvergate was in a fundamentally fragile position because banks were being dissuaded from engaging with crypto by regulators. As a consequence, crypto firms had few other choices with regards to crypto banking, so Silvergate — as the main crypto-friendly bank — was flooded with their deposits. This structural vulnerability was the direct result of the harassment levied by regulators against banks daring to service crypto clients. Ordinarily, an industry would be served by a wide variety of banks, reducing the exposure of any given bank to the sector. But because banks have generally been discouraged from touching crypto, deposits crowded into the small handful willing to bear the risks.
The reason that normal banks didn’t want to service crypto was because it would expose them to reputational costs and additional overhead (like stepped up KYC obligations and higher insurance premia) that were simply not worth it. Thus, the task was left to a small handful of banks — primarily Silvergate, Metropolitan (before they closed their crypto practice), and Signature. Silvergate and Signature administered critical infrastructure in their SEN and Signet networks, which allowed crypto firms to move dollars around quickly. So as of early 2023, Silvergate and Signature were quite exposed to the crypto space — and partly this was due to the fragilization brought on by the regulatory ringfencing.
Second, and this is no secret, bank regulators, but in particular the FDIC, dramatically increased the level of oversight on these banks around the turn of the year. Bank executives inform me now that they are forced to clear all new crypto clients proactively with the FDIC. This naturally puts a massive damper on any bank’s enthusiasm to support clients engaged in crypto activities. And it’s worth noting that the current FDIC chair, Martin Gruenberg, was the man responsible for Choke Point 1.0 from 2013 to 2017. His nomination for a second FDIC term under Biden was met with some protest at the time, but this wasn’t an issue in his confirmation. Obviously, he knows the Choke Point playbook inside and out. Against this backdrop, onboarding more crypto clients has become more costly and difficult, hindering the acquisition of new deposits.
Additionally, post FTX, several investigations were launched aiming to tie Silvergate to wrongdoing at FTX and Alameda. Silvergate, by all accounts, was a victim of Sam Bankman-Fried’s fraud, just as anyone else was. Aside from their FTX and Alameda ties, there is not yet public evidence that Silvergate’s AML and KYC vendors and practices materially differed from other banks, or whether SBF affiliates were able to get accounts at other US banks. Rather than pursuing a broad investigation of SBF ties throughout the banking system, federal investigators took a different tack, focusing specifically on Silvergate, and asserting the bank’s culpability in the matter. The reality of whether Silvergate did experience compliance failures, or whether they were simply lied to by a very effective conman will be revealed in time. In DC, the conclusion was already presumed: Silvergate was complicit, rather than merely a victim. Unsurprisingly, depositors began to desert them to reduce their own reputational exposure. Yet, according to Silvergate’s Q4 earnings release, digital assets deposits had risen from their lows, from $3.5B to $3.8B. The run seemed mostly contained, and January and February brought a much needed relief rally for both digital assets and its bond portfolio.
Lastly, and perhaps most importantly, in 4Q22 and 1Q23, Silvergate was dependent on advances from the Federal Home Loan Bank (FHLB), which it was using to honor withdrawals. In Q4, Silvergate had taken out $4.3B in advances from the FHLB so that they could handle outflows. They noted in a filing that being cut off from this facility would prove fatal. However, in early March, they abruptly repaid the entire facility, and promptly announced that they would be liquidating, sparking the broader bank run.
You’d think that, given what happened later, people would be very interested in understanding the immediate proximate cause of Silvergate’s collapse. But no one has figured out why the FHLB rugged Silvergate yet, nor do people seem to care. Matt Levine admits that no one actually knows why Silvergate was kicked out of the FHLB. He muses that “for political or regulatory or other reasons, the FHLB didn’t want to keep lending to Silvergate.”
Certainly, on the latter point, we know that the FHLB was under immense political and media pressure to unbank Silvergate. Many crypto critics were aghast that a Depression-era lending facility established to support mortgage lending was being used as an ersatz lender of last resort for a crypto-focused bank. Granted, providing secured loans to member institutions has always been a part of the FHLB’s mandate, and the scope has drifted significantly over the decades.
Regardless, progressives and crypto critics were scandalized by the apparent redirection of financial resources away from mortgage lending in favor of crypto activities. In a December 5 letter — then more explicitly in a January 30 letter — to Silvergate, Senators Warren, Marshall, and Kennedy called out the bank’s usage of the FHLB facility and suggested that it put the American taxpayer at risk. Adding to the pressure was the ongoing Federal Housing Financing Agency review to determine whether the FHLB loans were sufficiently in scope. For their part, post-Silvergate collapse, the FHLB denied that they had cut off Silvergate from existing loans, but specifically did not deny that they had refused to roll Silvergate’s facility (the loans were month to month). To analysts like Levine, the difference appeared marginal. Ultimately, not renewing Silvergate’s short term loan had the exact same effect as cutting them off from an existing facility — Silvergate had to sell bonds at a loss, undermining confidence in its ability to continue as a going concern and triggering a second and fatal run.
There may be some perfectly benign reason that Silvergate abruptly repaid their outstanding advance from the FHLB. They would have had to maintain a sufficient capital ratio to be eligible for the facility, and that could have declined since they disclosed it in their Q4 earnings. However, crypto markets and bonds were up in Q1, so it doesn’t seem likely that Silvergate’s capital ratio would have deteriorated over the period. The laws governing FHLB advances also give the bank the ability to renew existing advances to members “without positive tangible equity… provided, however, that a Bank shall honor any written request of the appropriate federal banking agency or insurer that the Bank not renew such advances.” It is indisputable that Silvergate’s FHLB usage was at the center of a political storm, that determinations to not renew FHLB advances are exceedingly rare, and that the same housing-related political requirements are not being demanded of other banks taking out FHLB advances for liquidity management purposes. Post-Credit Suisse collapse and broader fragility in the bank sector, I wonder if the politicians who harassed Silvergate regret their actions.
After the Silvergate run, progressives crowed victory. You’d think that faced with the prospect of further runs, members of Congress would be extremely wary of encouraging others. But instead, Senators Elizabeth Warren and Sherrod Brown celebrated the takedown of Silvergate. (If it emerges, as is widely suspected, that Warren’s office actually coordinated her campaign to undermine confidence in Silvergate with notorious short sellers, serious answers must be sought.) From the perspective of a depositor at a similar bank, this would have served as a signal to pull your funds. If influential members of Congress were rooting for the failure of crypto and tech-focused banks, why would you keep your funds there?
This isn’t the first time a member of Congress has arguably incited a bank run. Chuck Schumer is credited by the Office of Thrift Supervision with contributing to the 2008 collapse of Indymac, then the second largest bank failure in US history. Schumer, who served on the Senate Banking Committee, wrote a letter to bank regulators questioning the integrity of IndyMac, which became a self-fulfilling prophecy as the bank suffered a fatal run 12 days later. As CNBC wrote at the time: “When a senior senator who is in a number of influential posts regarding oversight of bank regulators directly attacks the confidence of a depository institution, it matters.” As we have seen, banks are fragile things and confidence crises brought on by powerful Senators can take them down, even if they are solvent. Just as with Schumer, Warren and her colleagues wrote a letter lobbing harsh allegations at the bank and predicting their downfall. In both cases powerful senior Senators on the Senate Bank Committee used their bully pulpit to publicly harass a bank which then failed shortly thereafter.
As we saw in 2008, runs cause widespread confident crises and require massively expensive interventions to stop. Schumer’s actions were deeply unwise then, as were Warren’s in 2023. The California Attorney General mulled an investigation over Schumer’s ill-advised actions in 2008, and they should do exactly the same this time.
Senator Warren is now calling for an investigation into the causes of the collapse. Her own actions should be top of the list for any neutral investigator. The bank run that began at Silvergate has now brought down titans like Credit Suisse and plunged the financial world into chaos. Investigators should be asking serious questions about whether the provocations of her office and her colleagues regarding Silvergate and FHLB had a material effect in instigating the collapse.
Part II: Did Signature “Die Duddenly” During The Chaos To Settle A Political Score?
If the demise of these banks can be analogized to a murder mystery, Silvergate was killed slowly and covertly with poison while Signature was shot in the street in broad daylight. On Sunday the 12th of March, Signature (SBNY) was abruptly sent into FDIC receivership by the NYDFS. This was not a two-bit crypto bank. They had $110B in deposits as of YE 2022, of which around 20 percent came from crypto-focused companies. They also administered the popular Signet product, which similarly to Silvergate’s SEN, allowed for crypto firms in their network to settle up fiat transfers 24/7/365. Because blockchains are running and churning all the time, relying on legacy banking hours for fiat settlement causes problems, particularly with liquidity to exchanges and stablecoins on the weekend. Especially after the demise of Silvergate, Signet was positioned to benefit as critical crypto infrastructure. On Sunday night, Signet, along with the rest of Signature, was abruptly delivered into the hands of the federal government.
Almost immediately, we knew something was wrong. Signature was not a “crypto bank” like Silvergate, where the majority of deposits were derived from crypto firms. It was a pretty venerable NY bank that primarily serviced real estate. It was not in as bleak a financial position as Silvergate or SVB, or other beleaguered regional banks. They weren’t closed on a Friday afternoon after market close, as is typical in receivership situations, but snuck in on a Sunday night, practically a footnote to the SVB shutdown. The FDIC was reportedly surprised on Sunday when SBNY was delivered in to their hands. The NYDFS has maintained a well known long-running animus against crypto. The bank crisis was the perfect cover to take down the last remaining bank which was unapologetic about servicing crypto firms (and ran important fiat settlement infrastructure).
The only problem: based on what we know, it appears that Signature wasn’t actually insolvent when they were nationalized and $4.3B of shareholder value was vaporized.
The crypto industry soon found an unlikely ally in Barney Frank: the former chair of the House Financial Services Committee, and the Frank in Dodd-Frank. Mr. Frank served on the board of Signature and had as keen an insight into their finances than anyone. Immediately, he alleged that Signature could have opened Monday, and that leadership was shocked when they were put into receivership. This shocked crypto folks, including myself, who immediately suspected foul play.
Frank would later elaborate on his claims in a blockbuster interview with New York Magazine’s Jen Wieczner. His comments leave absolutely no doubt that the closure was a political hit job, primarily motivated by a desire to send a message to the crypto industry. In the interview, he said the following:
DFS never actually said that Signature was insolvent
Despite pending outflows, Signature would have been operational Monday
DFS “overreacted” to SBNY’s inability to give them “sufficient data”
DFS “[doesn’t] want banks doing crypto”
SBNY was closed “pour encourager les autres” (to instill fear in others)
And Barney Frank is by no means a crypto booster. He has described himself as a skeptic. So his testimony cannot be motivated by a desire to paint the crypto industry in a positive light. The Wall Street Journal Editorial board, normally circumspect about crypto, found Mr. Frank’s statements sufficiently concerning to write two follow-up editorials. As more data emerged, even the taciturn WSJ became convinced that Signature was a political execution.
NYDFS pushed back, saying they had suffered a “crisis of confidence” in SBNY’s leadership, and that they weren’t provided with sufficient data in a timely fashion during the crisis. However, neither “confidence” nor “data” are acceptable reasons to expropriate a solvent bank, especially when other banks in a similar position were given time to save themselves and access the Fed’s new BTFP facility. New York banking law is extremely broad with regards to conditions under which banks can be seized by the superintendent. When challenged, New York will likely argue that conditions (c) or (h) in banking law 606 apply — namely that SBNY was in an “unsound or unsafe condition” or had refused to “submit its records and affairs to inspection.” Despite the vagueness, justifying the seizure of a solvent bank, something virtually unprecedented in US financial history, will be a high bar to clear.
Signature wasn’t in a particularly precarious position when it came to their held-to-maturity portfolio, which was the issue with SVB. In a note on Sunday morning in the wake of the SVB failure, Piper Sandler said that their balance sheet looked fine. Their ratio of unrealized losses to Common Equity Tier 1 capital before they were shuttered was just shy of 40 percent, in line with Wells Fargo and PacWest, and lower than that of First Republic, Comerica Incorporated, Fifth Third Bancorp, Huntington Bancshares, US Bancorp, KeyBank, and Bank of America.
In particular, the disparate treatment given to Signature versus their peers PacWest or First Republic is extremely telling. Both banks were in similar or worse financial positions, yet both were given time to save themselves, whereas Signature was seized on a Sunday night, right after SVB’s collapse. First Republic was given time to raise after the SVB collapse, and secured a $30B lifeline. However, their stock is down 87 percent in the last two weeks and they still appear likely to fail or be acquired. Clearly, they are in a financial position as bad or worse than Signature, yet they have been given plenty of time to sort things out. A banker familiar with the financials of both banks told me of First Republic: “it was a double standard compared to Signature — zero doubt in my mind.”
Subsequent developments with Signet and Signature’s crypto business all but confirmed our suspicions. Reuters reported on March 16th that Signature, if sold, would have to exclude their crypto business, according to two sources. This was later later denied by the FDIC, but lo and behold, when the FDIC announced on Sunday March 19th that Signature would be acquired by New York Community Bancorp’s (NYCB) Flagstar bank, the crypto business was not included. There could perhaps be a benign interpretation, such as NYCB’s involvement in Figure’s Provenance blockchain, which they might have seen as competitive with Signet. However, the overall crypto business (Signature had the second-most crypto deposits of any US bank) and the Signet IP is undeniably worth something, and the FDIC’s duty under law is to maximize the value of the entity being sold. This week I heard from crypto clients of SBNY that they were given 24 hours to withdraw their remaining deposits. Post-run, there were still $4b worth of crypto-related funds at the bank. Purging those deposits is not a move made by a bank that intends to maximize value from their established depository base.
If Signature is sold to NYCB and Signet is shuttered entirely, and none of their crypto relationships are ultimately acquired, the denials by the FDIC of any anti-crypto motive will look quite hollow. There is surely more to come, but for now it appears that Signature’s entire crypto business has been quashed by government mandate. If the FDIC indeed strips Signature of its crypto business — once accounting for around 20 percent of their depository base, they are surely not maximizing value for taxpayers, and stern questions must be asked.
Part III: Surveying The Wreckage
The 2023 banking crisis has truly exposed the inherent instability in our financial system. Any bank would struggle to survive massively whipsawing interest rates. Depositors can’t be blamed for fleeing to safer havens. The fiat-only system has rewarded us with a second major financial crisis in our lifetimes, which will yet again require trillions in bailouts. The system in existence since we severed the tether to gold in 1971 has been a rank failure, and it’s no surprise that Bitcoin has found a renewed vigor throughout this latest financial crisis.
The value proposition of Bitcoin — an asset which is no one’s liability, and can be truly owned and held in individual self-custody — has never been more evident. Many in the crypto space see Bitcoin’s recent price performance juxtaposed against that of risk assets or financial indices as validation of this thesis.
However, the effective decapitation of the pro-crypto bank sector has caused real problems. Silvergate’s SEN and Signature’s Signet were essential infrastructure powering 24/7/365 dollar clearing for crypto firms. Those are now effectively offline or unusable. Because blockchains settle without interruption, frictions emerge when they intersect with the 9 to 5 world of banking. Stablecoins may have trouble keeping their pegs on the weekend. Market makers and exchanges can’t settle with each other as easily. Expect liquidity to suffer as a result.
Crypto firms that need banking have a harder time than ever. I can personally attest from our own experiences in the last two weeks at Castle Island that many banks have simply adopted a “no crypto” rule. Others demand a certain threshold of assets to overcome the crypto prohibition, or insist that crypto only account for a small portion of your revenue or source of wealth.
There are a dozen or so onshore banks that have stepped up to fill the gap. However, their names are whispered and circulated in private chats among investors and founders. Everyone knows that any bank that emerges as a leader in the crypto space will risk the same fate that befell Silvergate and Signature. So the few banks that are brave enough to bank crypto firms operate in secrecy. And due to this artificial 15 percent threshold on crypto deposits imposed by the FDIC, no bank can ever recreate the network effect of SEN or Signet. Unless a large bank steps in (and none have so far) a competitor with a crypto book simply can’t onboard enough crypto clients to create a strong network around real-time fiat settlement.
Based on the dozens of conversations I’ve had with bankers that service crypto clients, the atmosphere is one of abject terror. Crypto firms getting denial after denial from these banks is bad enough, but within them, the regulators have cultivated a horrific environment. Everyone has seen what happened to Silvergate and Signature — they understand that they could be shut down or seized at the faintest hint of trouble, even if solvent. Certain banks that serve crypto clients tell me they are getting daily calls from the FDIC demanding lists of crypto clients pressuring the banks to unbank them. (Note: the FDIC is meant to clear updates to the data requests that they make of banks with the Office of Management and Budget, but when they added crypto to the questionnaires in Q4, they failed to do this.)
Banks are now being told to individually run all new crypto business by the FDIC before they do any onboardings. Many of these bankers want to help these potential crypto clients, but because of these verbally-messaged 15 percent thresholds (which could well shrink to zero), they can only allocate a certain ratio of their deposits to the industry, so they have to pick and choose the firms they are able to support. This causes a ‘goldilocks’ issue, whereby banks must prioritize medium to large clients (not too big to as to breach the threshold, but not too small so as to make the additional cost burden not worth it). Financial considerations mean that smaller crypto clients are left in the cold.
Most worryingly, the takedowns of Silvergate and Signature represent a rank lawlessness associated with authoritarian regimes. In a lawful society, solvent banks are not seized by the government simply because their clientele is politically disfavored. Shareholders in Signature had $4.3B in equity ($22B at peak) wiped out with no recourse. This is a confiscation that you might expect from the CCP, not NYDFS. The US has already put the world on notice by weaponizing the Treasury market with their seizure of Russian reserves. It’s no secret that foreigners are divesting as a consequence, and trying to reduce their exposure to the dollar and the dollar settlement system. The dollar’s pre-eminence globally, long considered unimpeachable, is fraying, as Russia, China, and the Saudis look to settle in alternative currencies. The US can ill-afford to sow mistrust in its own banking system.
The public deserves answers to why an apparently solvent and functional $100B bank was seized on a Sunday night with no notice. Lame excuses like “insufficient data” or a “crisis of confidence in leadership” are nowhere near sufficient explanations to justify the third largest bank closure in US history. DFS additionally questioned SBNY’s “ability to do business in a safe and sound manner on Monday.” Of course, this is a bit of a catch-22, as all crypto-focused banking has been derided repeatedly by bank regulators as incompatible with bank “safety and soundness,” as I covered in my prior note, and as was elucidated in Congressional testimony by former OCC Chief Counsel Jonathan Gould. If you declare a certain type of business incompatible with bank safety and soundness, and then close the bank on a soundness basis, it’s just a long-winded way of saying “this particular legal industry is banned.” Real answers must be sought.
Those paying attention in the crypto space are scandalized, but have largely failed to react. As of yet, no meaningful pushback has materialized, with the exception of that from Whip Emmer, who accused the FDIC of “weaponizing recent instability in the banking sector to purge legal crypto activity from the US.” Former Comptroller Brian Brooks also alleged that bank regulators were using the crisis to choke off crypto-focused banks.
What must happen here is an honest investigation into the causes of the bank crisis, and in particular the role that federal regulators and members of Congress played. Crucially, the public deserves to know whether Signature was arbitrarily seized during the fog of war to advance a political agenda. Shareholders who saw their equity wrongly vaporized should sue under New York law. Clients of these banks who suffered business impairments on account of rapid forced withdrawals (and a general unwillingness of other banks to support them) or the closure of SEN/Signet also have a case here.
To the FDIC and OCC, I would ask the following:
Were you aware that by discouraging banks from serving crypto, you caused deposits to crowd into a small handful of banks, rendering them highly exposed to the sector?
Do you acknowledge that the harassment leveled at crypto-focused banks increased the fragility of those institutions, contributing to their eventual collapse?
You spent months lambasting the crypto space for posing a “safety and soundness” risk to banks — do you acknowledge that the risks that actually materialized were systemic, and primarily a function of rapidly rising interest rates, bond portfolio losses and the velocity of electronic deposits and information?
How much time and resources have your agencies allocated to crypto issues over the last three months? To what extent has your focus on crypto detracted from your ability to monitor broader systemic and generalized risks in the banking system?
Do your bank run models account for faster run possibility due to online and mobile banking (and in July, FedNow), and will you be raising liquidity and capital ratios as a consequence?
Why were First Republic Bank and PacWest (each with no crypto practice, but each in a worse financial position) given time to save themselves when Signature was seized and given no time to procure liquidity?
What communication have you had, if any, with the FHLB with regards to Silvergate? What was the actual cause of their advance being abruptly terminated?
FDIC Chair Martin Gruenberg presided over the first Choke Point campaign from 2013-17. How can the public expect impartiality if he has a track record of politicizing banking against disfavored industries?
What authority grants you the power to cut off banking access for an entire industry with no Congressional approval?
Did anyone at your agency install a verbally-messaged 15 percent maximum threshold for crypto-related deposits at banks in Q4 2022, and single-digit percentages for banks not already active in crypto? Was this official agency policy, and if so, by what process did you arrive at this threshold?
If so, under what authority did you institute these thresholds, and why did you do it informally, and not in writing?
When you broadened your data requests to banks to cover crypto in Q4 2022, why did you not obtain permission from the OMB first?
After Reuters reported that Signet would not be included in a Signature acquisition, you claimed this was inaccurate. Did you walk back that guidance because you realized it was unpopular? Do you acknowledge that Reuters’ reporting was accurate given that Signature’s digital business was not ultimately included in the sale to NYCB?
To NYDFS, I would ask the following:
Was Signature solvent on March 12th, when it was sent into receivership by NYDFS?
Why was Signature sent into receivership, given its apparently non-catastrophic financial situation over the weekend? What factors played the largest role in your decision to seize the bank on Sunday night, as opposed to letting it open on Monday?
Will an acquirer be permitted to restart Signature’s crypto practice, including Signet? If not, what is your possible justification?
Financial regulators have repeatedly claimed that crypto that poses a ‘safety and soundness’ risk to banks. You justified Signature’s seizure on ‘safety and soundness’ terms — so are you admitting that it did indeed have something to do with its crypto business?
To Senator Warren, I would ask the following:
Do you acknowledge that pressuring FHLBs to discriminate against crypto banks contributed to the demise of Silvergate and the resulting bank run, which then spread to the entire global financial sector?
Do you acknowledge that celebrating the run on Silvergate would have encouraged depositors at other crypto-facing banks to withdraw their deposits, worsening an escalating crisis?
Did you coordinate with high-profile short sellers when you wrote your letter to Silvergate leadership in December 2022 and then January 2023, just two months before Silvergate’s fatal run?
To what extent have you communicated with bank regulators about crypto-specific topics compared to interest rate risk? In retrospect, would you say you have spent a disproportionate amount of attention on the risks emanating from crypto, as opposed to core risks to bank business models? Why do you think crypto warrants such a large amount of attention compared to these other risks?
To the Fed, I would ask the following:
Custodia proposed an over-reserved business model holding only short-dated government securities, yet their application was denied. Do you acknowledge that a fully-reserved bank could have supported crypto firms without passing on any volatility from the crypto industry?
Could you have better anticipated the crisis at SVB if you had spent less time worrying about the crypto sector and worrying more about the effect of rising rates on bank balance sheets? How much time and resources have been allocated to topics of crypto supervision compared to the impact of rising interest rates on banks?
Do your stress tests include adverse scenarios wherein benchmark interest rates rise 5 percent in a given year? If not, how suitable were stress test scenarios in identifying the risks of last year’s monetary policy? Would last year’s stress tests have caught issues at regional banks under the Dodd-Frank asset threshold given the scenarios tested?
How did you completely fail to anticipate the risks of rising rates on bank balance sheets? Do you acknowledge that you entirely failed in your bank supervisory job, given your inability to anticipate SVB?
To what extent did the development of Fednow play a role in your supervision of private sector clearing networks such as Signet and SEN?
Do you acknowledge that campaign’s by high-profile Senators against Silvergate contributed to a loss of confidence in the banking system and encouraged further runs?
The people behind this lawless attack on a legal industry have names, and they should be questioned to the fullest extent possible, by anyone that cares about the rule of law, due process, and the integrity of our financial system. As far as I’ve been able to reconstruct, primary responsibility for the coordinated crackdown rests with the following individuals, scattered across agencies, states, and Congress.
The most visible smoking gun is DFS’ decision to seize Signature that fateful Sunday. The FDIC and the OCC are the main agencies being used to cajole and bully banks into cutting off crypto. Ultimate direction is coming primarily from Bharat Ramamurti, formerly of the National Economic Council (the primary economic decision-making body in the White House), who now serves as Senior Counselor to the President. Ramamurti got his White House job through Senator Warren after working in her office from 2013 to 2019 as senior counsel for banking and economic policy.
The failure of these banks is now being represented as a crypto issue, or in the case of SVB, a story of undue risks taken with their bond portfolio and a flighty depositor base. But the failure of the crypto banks stems in large part from the regulatory harassment that these banks have endured over recent months. In this case, regulators and politicians were not merely warning of potential issues, they were actually causing the issues in the first place. As is so common with bank regulation, in trying to mitigate risk, they actually amplified or created risks which may have not existed in the first place. In another, better world, the Fed would have approved Custodia’s full-reserve model years ago, and crypto firms would have happily banked with them without passing on any risk whatsoever from the volatility of the industry (Custodia proposed holding all deposits in short dated treasuries and doing no maturity transformation). But the Fed denied Custodia, and industry firms crowded into riskier banks instead.
Post-collapse, financial regulators are using the examples of Silvergate and Signature to make the case to any other banks that would do business with crypto firms. Pour encourager les autres. Shoot the stallion to scatter the herd. But the collateral damage of this hunting expedition is immense. These are not examples of crypto business gone wrong. They are examples of assassinations of otherwise functional banks that dared to service a politically disfavored industry. It’s not just crypto enthusiasts that should be worried. Choke Point 1.0 extended to 30 distinct industries. It’s anyone’s guess how far they will go with the more aggressive and overt 2.0. And I hesitate to imagine what these tools would like if wielded by a revanchist second term Trump, or a ruthless DeSantis. When finance is politicized, everyone is a potential target.
Thanks to Makesy, Austin Campbell, and Omid Malekan for their feedback on this article.
Fantastic article. Well worth the long read. It was expertly explained in an easy to understand form.
Floating about Trump as a little orange phantasm at the end was a little much, though, and detracted from the rest of the piece.
Use of Trump to evoke a penumbra of even greater doom seems a bit unsubstantiated unless you're going to list things he did as president to that lead you to believe he would act worse in regards to crypto and banking.
Fantastic analysis. Hope to see pirate wires on Capitol Hill soon. ESG x CBDC = social credit digital gulag. Here are the cringe receipts from SVB: https://yuribezmenov.substack.com/p/svb-linkedin-receipts