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| By Nilus Mattive |
Silvergate Bank. Silicon Valley Bank. Signature Bank.
Beyond the fact that they all start with “Si,” the real commonality is all three of these “failed” banks were friendly to crypto businesses.
In fact, Circle had some of its cash reserves for its USD Coin (USDC, Stablecoin) parked at each of the three. This is why USDC lost its peg to the dollar at the very height of the banking panic, as investors worried whether liquidity would be compromised.
Additionally, Silvergate and Signature were two of the major banks used by Coinbase Global (COIN).
So, these financial institutions were critical pieces of infrastructure for U.S.-based crypto businesses. And the mainstream narrative is that this exposure to crypto was a direct cause of their downfall.
But maybe it is the opposite.
Perhaps Washington created some of these issues and is now conveniently using crypto as the scapegoat ... or worse. This could be part of a scheme to use a much-larger banking system problem to simply remove the crypto world’s access to traditional U.S. banking resources.
I know, that sounds a little too much like a conspiracy theory, right?
Well, even if this seems far-fetched, it has already happened before. This is precisely what the government did back in 2013 under a program called Operation Choke Point. The idea was cutting off banking access to businesses it did not like, including firearms dealers and payday lenders.
And although the government publicly stated it was not going after any particular industry or any company operating legally, plenty of evidence has since contradicted those claims — right down to internal Federal Deposit Insurance Corporation emails.
Some prominent figures in the crypto world have labeled recent events as Operation Choke Point 2.0. But is this an accurate statement?
To start, let’s examine the evidence bank by bank in chronological order.
Silvergate was the first to make big headlines. It had a high concentration of its business with crypto firms, many of which were feeling the pinch of crypto winter.
However, there was one big issue that caused panic about Silvergate to accelerate: Senators continually — and quite publicly — hammering the company about its relationship to FTX and other elements of its crypto-friendly business.
In fact, Silvergate ended up voluntarily unwinding its business because of “industry and regulatory developments.” It did not really fail. It quit the game under intense pressure and scrutiny.
That is when we started hearing more about problems at Silicon Valley Bank.
The firm was highly focused on the technology industry, with many crypto businesses falling under that larger umbrella. And it is easy to see why SVB got in trouble.
A lot of the bank’s young startup clients — even riskier enterprises in an already cyclical sector — were experiencing downturns and needed to pull more and more cash.
Even though much of the bank’s money was parked in normally safe assets, such as U.S. Treasurys and agency mortgage-backed securities, these assets faced significant losses because of the Federal Reserve’s recent actions.
Then, the rumors and preemptive withdrawals — exacerbated by a tight-knit group of venture capitals and tech titans tweeting — cascaded the situation into a classic bank run.
Now, was there mismanagement on SVB’s part? Of course. But one of the largest factors leading to its collapse was a historic round of aggressive interest rate hikes that made mincemeat of its safe balance sheet assets. This was the Fed raising rates until it broke something.
And SVB was hardly unique in its exposure to that Fed-induced pain. Which brings us to Signature — a smoking gun that proves this could be as much about cutting off crypto funding as it is about preserving deposits.
SBNY had already been reducing its exposure to crypto businesses to alleviate any concerns regulators or investors might have. This is despite it already having an incredibly diversified list of customers … many of whom operated relatively stable industries.
In fact, in a special update — largely posted to ease growing rumors and a resulting market sell-off — SBNY said it had intentionally reduced its crypto-related deposits down to $1.51 billion and that deposits from other areas were actually rising.
It also reminded everyone it did not trade or custody digital assets. Nor did it accept them as collateral.
What about its reserves? While it had plenty of underwater Treasurys and other safe assets on its balance sheet, the vast majority of those were in the “hold to maturity” category. This is the case for many other banks — including big names like Citigroup (C), Wells Fargo (WFC) and Bank of America (BAC).
Most important, on the same day that New York regulators decided to seize SBNY, the U.S. government — specifically the Fed, Treasury and FDIC — announced its program to backstop any of these problematic assets anyway.
So, we are left wondering what the “systemic risk” cited by regulators was exactly. And we are not alone.
Barney Frank, a board member at Signature and one of the two architects of the Frank-Dodd bank legislation that went into effect in the wake of the 2008 global Great Financial Crisis, told an interviewer:
“I think that if [SBNY] had been allowed to open tomorrow, that [it] could’ve continued — we have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit … I think the bank could’ve been a going concern.”
Frank continued, saying he believes New York regulators decided to shutter the bank because they “wanted to send the message that crypto is toxic.”
For their part, regulators denied that allegation, responding that their decision “was based on the current status of the bank and its ability to do business in a safe-and-sound manner on Monday.”
They followed up with the revelation that SBNY was also being investigated for its dealings with crypto firms and whether it took adequate steps to monitor its activities for money laundering. But that would clearly be a separate issue from the bank’s ongoing viability.
Regulators also denied allegations that they would require any company acquiring Signature to stop doing business with crypto companies as well.
However, when the FDIC subsequently sold off most of Signature’s assets to a subsidiary of New York Community Bancorp (NYCB), digital asset-related accounts were not included. Instead, those deposits were to be returned directly to their owners.
We can only hope that more details emerge in the weeks ahead. Because based on a quick analysis of SBNY’s business relative to other banking peers, it is hard to understand why it was singled out. And without more evidence to the contrary, Frank’s assertions make a whole lot of sense.
That was precisely the conclusion reached in a follow-up piece in The Wall Street Journal, “Signature Bank’s Crypto Execution,” too.
And it is why U.S. House Majority Whip, Rep. Tom Emmer (R-MN), sent a letter to FDIC Chair Martin Gruenberg asking whether his agency was really attempting to “purge legal digital asset entities and opportunities from the United States.”
If true, it is impossible to ignore the irony of the traditional banking system now being used as a weapon against crypto-friendly businesses and the entire crypto ecosystem.
Even if “the Runway Is Getting Shorter,” the Plane Has Already Taken Off
Back in December 2022, Securities and Exchange Commission Chair Gary Gensler told Yahoo Finance that crypto platforms, exchanges and lending platforms would either come into regulatory compliance by working with his agency or face “more enforcement actions.” Then, he warned that their “runway is getting shorter."
Fast-forward a few months, and it’s clear he was not bluffing. Combined with increasing scrutiny from the White House, IRS, members of Congress and plenty of other people in Washington, it’s clear the crypto industry is facing a barrage of attacks in the U.S.
But it’s important to remember crypto is garnering all this attention because it’s gaining more prominence and momentum.
The reality is, even if all the lawmakers and regulators finally manage to agree on what is what and who is in charge …
Even if they completely shut down most of the convenient on-ramps into the world of crypto or reduce U.S.-based crypto-related companies’ access to capital and banking …
Even if they tried to flat-out ban certain types of digital assets altogether …
It is too late.
Crypto has already proven itself to be a global shape-shifter, partially because it is decentralized by design.
And even countries like China have not been able to stop it.
And with new cracks appearing in the TradFi system, crypto’s appeal here in the U.S. is only growing.
This is precisely why prices caught fire in the wake of the banking problems!
So, when you sum it all up, there are several important takeaways.
As the U.S. financial system is showing more weakness largely because of continued mistakes on the monetary policy front, lawmakers are using any possible angle to try and maintain their control over the system and your money.
Yet, despite their best efforts, crypto has finally — and permanently — created an alternative to the long-standing status quo.
So, crypto is not the cause of this current situation. In fact, it was expressly designed to be a solution for what is happening right now.
Therefore, our recommendations are quite simple:
First, if you have any open losses and have not yet taken advantage of tax-loss harvesting, now is the time!
I explained this TradFi strategy in an earlier issue of Weiss Crypto Daily, which you can read about here.
Second, if you are looking to shelter at least some of your crypto investment portfolio from future U.S. taxation, strongly consider using a self-directed Roth IRA account. This allows you to fund your account after-tax money so it can grow tax-free from that point forward.
There are a few stipulations to note. One is that tax-free withdrawals only apply once you reach 59½ years of age and the account has been held for a minimum of five years. But even if you’re under that age limit, there is only a 10% early withdrawal penalty and regular taxes on any gains.
Another consideration is that contributions phase out once your modified adjusted gross income hits a certain level.
So, the higher your income gets, the less you can contribute to a Roth IRA. And once your income hits a certain amount, you won’t be able to contribute at all.
For 2022, the phaseouts start at $129,000 for single filers and $204,000 for joint filers.
Third, for all other wealth that you want to keep in digital assets, use self-custody to achieve the highest level of safety, security and portability.
There are several self-custody options. I suggest you review The Weiss Guide to Crypto Wallets for a few of those.
Best,
Nilus
