Evidence Grows that Crypto and Federally-Insured Banks Are a Combustible Mixture

Gunnar Larson g at xny.io
Wed Nov 23 07:16:18 PST 2022


The fallout from the collapse of the crypto exchange FTX and its missing
billions of dollars of customer funds has, finally, galvanized some members
of Congress to push back against the swarms of crypto lobbyists whose
activities are clearly impacting the safety and soundness of U.S. banks.

On Monday, Senator Sherrod Brown (D-OH), Chair of the Senate Banking
Committee, along with Senators Jack Reed (D-RI), Chris Van Hollen (D-MD),
and Tina Smith (D-MN), sent a letter to federal banking regulators warning
that SoFi, a federally-insured bank, potentially posed a risk to safety and
soundness as a result of its digital asset trading activities. The Senators
wrote as follows:

“In January 2022, SoFi received approval from the Federal Reserve for the
acquisition of Golden Pacific Bancorp, Inc. and a conditional approval from
the Office of the Comptroller of the Currency for the creation of SoFi
Bank, N.A. SoFi completed the acquisition in February 2022. As part of the
approval, the Federal Reserve provided SoFi with two years to divest from
SoFi Digital Assets — a nonbank subsidiary that allows retail investors to
buy and sell digital assets — or conform the subsidiary’s impermissible
digital asset activities to the law. During this conformance period, SoFi
has committed not to ‘expand [its] impermissible activities,’ except as
specifically authorized by law. SoFi initially agreed to these terms, but
since the acquisition, SoFi Digital Assets has apparently expanded its
retail digital assets operations.

“Two months after receiving regulatory approval, SoFi announced a new
service allowing customers of its national bank to invest part of every
direct deposit into digital assets with no fees. The company publicly
billed this service as ‘the latest expansion of SoFi’s offerings to make it
simpler to get started with cryptocurrency investing.’ SoFi’s own investor
protection materials, however, warn customers that at least one token
listed on SoFi Digital Assets is ‘a crypto pump-and-dump’ hazard with ‘no
special use case or features’ and that ‘[it] might be among the most
high-risk endeavors an investor can take.’ Troublingly, this conduct raises
questions about SoFi’s compliance with commitments made in the January 2022
approvals and to meeting its ongoing obligations as a banking organization.

“SoFi’s digital asset activities pose significant risks to both individual
investors and safety and soundness. As we saw with the crypto meltdown this
summer, where crypto-assets lost over $1 trillion in value in a matter of
weeks, contagion in the banking system was limited because of regulatory
guardrails. In the event of crypto-related exposures at SoFi Digital Assets
ultimately require its parent company, bank holding company, or affiliated
national bank to seek emergency liquidity or other financial assistance
from the Federal Reserve or FDIC, taxpayers may be on the hook. Your
agencies have publicly acknowledged these types of crypto-related risks. In
fact, the Fed issued guidance detailing the risks posed by crypto-asset
related activities to cybersecurity, anti-money laundering and countering
of financing of terrorism efforts, consumer protection, and financial
stability. Similarly, the OCC called out the volatility of crypto
activities and the risks of the crypto ‘hype-driven economy’ to investors
of modest means, and the FDIC issued an advisory warning of the risks to
consumers when crypto companies misrepresent the availability of deposit
insurance for crypto assets.”

The Senators asked the banking regulators to force SoFi to comply with “all
consumer financial protection and banking regulations.”

You can read the letter to the banking regulators here and the very strong
letter to SoFi’s CEO, Anthony Noto, here.

How did the U.S. banking system become the playground of crypto
billionaires? The answer is that they had a lot of help from some
Republican members of Congress who sit on the Senate Banking and House
Financial Services Committees. We have, to our repulsion, watched these
Senators and Reps shill for the crypto industry during hearings for years
as if they are actually the industry’s registered lobbyists. See our
report: As Bitcoin Crashes 34 Percent in a Week, U.S. Congressman Ted Budd
Pushes Bank Regulator to Approve More Crypto National Bank Charters. (God
help us all, Ted Budd (R-NC) was elected as a U.S. Senator from North
Caroline in the midterm election this month.)

Another big shill for the crypto industry is Pat Toomey (R-PA), who,
thankfully, has decided to retire from Congress. This is what Toomey had to
say about crypto at a Senate Banking hearing last week:

“I want to follow up on a comment the Chairman made. I think I heard the
Chairman refer to crypto as ‘risky new financial products’ and the
insinuation was that they might have the ability to crash our financial

“I think there’s a really important distinction that I want to underscore
here. If you look at what happened with FTX, at least what appears to have
happened by a very extensive coverage, this is fundamentally not about the
kind of assets that were held by FTX. It’s about what individuals did with
those assets.

“There are a lot of corollaries. There are a lot of analogies here. One
comes to mind. In 2011 MF Global commodity brokerage firm, it was run by
former New Jersey Senator Jon Corzine. It collapsed after customers funds
were misappropriated to fill a shortfall caused by the firm’s exposure to
some trading that went south. Now, nobody suggested that the problem was
the instruments that were used. The problem was the use of customers funds.
Similarly, the 2008 financial crisis involved disastrous consequences with
what people were doing with mortgages. Did we decide we gotta ban
mortgages? Of course not.”

Toomey, like most other crypto shills, has the ability to sound like he’s
making the most sensible arguments that any intelligent person could make.
But on closer examination, every single point he makes in the three
paragraphs above collapses as quickly as FTX.

Let’s start with the statement that “this is fundamentally not about the
kind of assets that were held by FTX.” In reality, this is totally about
the kind of assets that were held by FTX – and used to perpetuate a fraud.
The speed at which the fraud unraveled is also totally “about the kind of

What Sam Bankman-Fried, co-founder and CEO of FTX, did with the help of his
closest colleagues, was to create their own magic money. It was a crypto
token called FTT. It was backed by nothing more than the hyped reputation
of FTX, its celebrity endorsers, and the fawning media’s coverage of faux
billionaire Sam Bankman-Fried. In that sense, FTT functioned much like the
“stock” of FTX.

The price of FTT soared through a buying binge between FTX and
Bankman-Fried’s own hedge fund, Alameda Research. FTT’s price went from
less than $4 in December 2020 to more than $84 in September 2021 – a 2,000
percent gain in less than a year. FTT is trading at $1.29 this morning.

CNBC explains what was going on with the FTT token as follows:

“The source explained that Alameda could post the FTT tokens it held as
collateral and borrow customer funds. Even if FTX created more FTT tokens,
it would not drive down the coin’s value because these coins never made it
onto the open market. As a result, these tokens held their market value,
allowing Alameda to borrow against them – essentially receiving free money
to trade with.

“FTX had been able to sustain this pattern as long as it maintained the
price of FTT and there was not a flood of customer withdrawals on the
exchange. In the week leading up to the bankruptcy filing, FTX did not have
enough assets to match customer withdrawals, the source said.”

Reuters reported that Bankman-Fried had moved as much as $10 billion of FTX
customers’ money to his hedge fund, Alameda Research, through a “backdoor”
in its software. Alameda lost much of the money on wild bets while $1
billion to $2 billion had just “disappeared,” according to Reuters. The
Financial Times reported that FTX held just $900 million “in easily
sellable assets” against $9 billion “of liabilities the day before it
collapsed into bankruptcy.”

To attempt to equate what FTX was doing with commodity markets or mortgages
is a clever sleight of hand by Toomey. But it fails miserably. Commodities
have traded on exchanges for centuries. Home mortgages have been used in
the U.S. since the 1930s. Crypto is new and risky and unstable and based on
nothing more than thin air in most cases and has been collapsing since
almost the moment it was introduced.
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