Cryptocurrency: Prophesized War Against Crypto Is Now Here, Fight Back re CBDC WarOnCrypto WarOnCash

[grarpamp]

Cypherpunks predicted a massive war between Crypto and Fiat.
And in many more ways and instances than in these articles,
that war has now been launched, and there will be physical casualties.
GovBankPol's and Deep State's Fiat will stop at nothing to preserve
its own power. They are killing Cash and rolling out CBDC, and you will
lose all financial freedom, and thus all personal freedom, forever.

Personal Monetary Sovereignty, the Freedom to Transact,
is Everything, and without it, you lose, Everything.
You must join forces and fight to win. Now. There is no other option.


https://www.piratewires.com/p/2023-banking-crisis

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
Nic Carter
Mar 23

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.

-Solana
Getty Images / Bill Clark

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.
Twitter avatar for @biancoresearch
Jim Bianco biancoresearch.eth @biancoresearch
The total return of the 30-year Treasury bond was a 15.66% LOSS in the
first quarter. With data going back to 1976, this marks the worst
quarter on record for the long bond. (1/3)
Image
3:36 PM ∙ Apr 1, 2021
227Likes83Retweets

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?
Getty Images / Bloomberg

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.
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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.
Chuck Schumer / Image: Lorie Shaull

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
1
2
. 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.”
FRC over month

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
inflationchart.com

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.
Graphical user interface, application Description automatically generated

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.

-Nic Carter
1

https://www.wsj.com/articles/signature-banks-crypto-execution-c707bb48
2

https://www.wsj.com/articles/signature-bank-new-york-community-bancorp-flagstar-bank-crypto-barney-frank-fdic-9b825e2e
Comment
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A guest post by
Nic Carter
Partner at Castle Island Ventures.
	
7 Comments
	
Houstonia
Mar 23Liked by Nic Carter

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.
Reply
	
Yuri Bezmenov
Writes How To Subvert Subversion with …
Mar 23Liked by Nic Carter

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
Reply
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