Cryptocurrency Banks Give Up – Crypto Critics' Corner

Cas Piancey and Bennett Tomlin discuss Silvergate, Signature, Metropolitan, and other cryptocurrency banks in light of their massive deposit outflows and increasing regulatory issues. American Banker Post about Silvergate using Home Loan bank advances: https://www.americanbanker.com/news/silvergate-bank-loaded-up-on-4-3-billion-in-fhlb-advances OCC, Federal Reserve, and FDIC statement on risks to crypto banks: https://www.fdic.gov/news/press-releases/2023/pr23002a.pdf This video was recorded on January 12th, 2022.

Cas Piancey and Bennett Tomlin discuss Silvergate, Signature, Metropolitan, and other cryptocurrency banks in light of their massive deposit outflows and increasing regulatory issues.

This episode was recorded on January 12th, 2022.

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Other episodes mentioned in this episode:

• Episode 101 – Banking on Regulators – A FTX Story (Recorded Live)
• Episode 19 – Inflation, deflation, and stablecoins with Frances Coppola (Part 1)
• Episode 20 – Algorithmic stablecoins and regulation with Frances Coppola (Part 2)

Other resources mentioned in this episode:

• American Banker Post about Silvergate using Home Loan bank advances
• OCC, Federal Reserve, and FDIC statement on risks to crypto banks

Where to find Crypto Critics’ Corner:

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• Bennett’s Twitter
• Cas’ Twitter
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• Bennett’s Blog
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English Transcript:

00:00:05:00 - 00:00:11:20
Cas Piancey
Welcome back, everyone. I am Cas Piancey. I'm joined, as usual by my partner in crime, Mr. Bennett Tomlin. How are you today?

00:00:12:28 - 00:00:17:06
Bennett Tomlin
Okay. I guess it's another day in crypto where everything's falling to pieces.

00:00:18:09 - 00:00:21:01
Cas Piancey
It just keeps coming. It just keeps coming. There's. It doesn't stop.

00:00:21:25 - 00:00:22:17
Bennett Tomlin
I miss sleep.

00:00:22:26 - 00:00:47:09
Cas Piancey
We're going to ignore all the noise that's been going on today. We're recording on Thursday, January 12th. We're going to focus ourselves on something that we have been really getting into, which is Silvergate, all these banks Signature, Silvergate, Metropolitan they're all struggling. These are cryptocurrency related banks. These guys have really been involved with the cryptocurrency industry in general.

00:00:47:09 - 00:01:02:23
Cas Piancey
That's a lot of their customers. We previously have discussed how like Signature was selling all of their customer deposits, their cryptocurrency customer deposits, which is not something you generally see banks do. Why don't you kick us off? And I'd love to hear your takes on on some of this stuff.

00:01:02:28 - 00:01:30:15
Bennett Tomlin
Sure. I think one of the most interesting things to start with is like how Silvergate and Signature kind of function. They each had their own kind of version of this Silvergate had one called Silvergate Exchange Network and Signature had one called Signet. And what this was, was a way for exchanges to effectively by banking at Silvergate or a Signature, be able to send funds to any other exchange quickly, rather than waiting for the normal process.

00:01:30:15 - 00:01:49:14
Bennett Tomlin
It could be done effectively, instantaneously between any of these exchanges. And so as more and more exchanges and crypto companies signed up for the free, these networks, you started to see a little bit of this network effect, kind of like we saw at the beginning of Tether, where each new one that integrated made it more appealing for others to integrate because you could take advantage of the existing network.

00:01:49:22 - 00:02:11:11
Bennett Tomlin
And so because of these networks, or at least driven in part by these networks, we saw both of these banks Silvergate and Signature build up billions of dollars in deposits, and now both of them have lost billions of dollars in deposits. $8.1 billion was withdrawn from Silvergate post FTX Signature ended up selling 8 to $10 billion in customer deposits.

00:02:11:11 - 00:02:38:09
Bennett Tomlin
Both of them have needed to like look to alternative sources of funding in order to sustain themselves. We'll get into that more in a minute, I think. And the other thing that I think is interesting is Silvergate, it turned out, was banking FTX through an Alameda research entity called North Dimension Inc and Signature is banking finance or was banking Binance at least through an entity called Key Vision Development Ltd.

00:02:38:18 - 00:02:59:00
Bennett Tomlin
And so structurally there's so many similarities between these two banks from the networks they were using, from the amount of deposits they've lost over the last couple of months to the performance of their stock prices to like everything else they've had to do. They think looking at these two right now, in this moment, you're really seeing how this exposure to the crypto ecosystem has hurt these banks.

00:02:59:04 - 00:03:19:29
Cas Piancey
It's really funny because we've previously I think a lot of people just kind of presumed that there was no exposure to the real world financial ecosystem, which was a mistake. I mean, I've been talking about how this could sneak its way into the real world repeatedly for a while now. And even you, I think, have often disagreed with me and thought like, no, there's no way.

00:03:19:29 - 00:03:40:08
Cas Piancey
Like it's cut off. I've been saying this for a while, that this is absolutely now a part of the traditional financial system. And if you want to have an idea of exactly how Signature is the perfect example now, because what we had was essentially a bank run. We had a real life bank run on a real life bank if we look at their ticker.

00:03:40:13 - 00:04:04:19
Cas Piancey
So today of the day of recording, they are up 13% from their previous from the previous day. They're trading at 1375. That sounds great. Let's keep in mind, however, that they traded at one time for almost $220 a share. So that is a massive fall from grace, for sure. But it's not just about their stock price going down.

00:04:04:19 - 00:04:33:18
Cas Piancey
It's not just about this bank run. It's about how they tried to cover up their bank run, which I had never heard of. This most people I know had not heard of this. It's a really interesting and strange governmental agency. It's called the Federal Home Loan Banks System. It's 11 government sponsored banks that, quote, provide liquidity to the members of financial institutions to support housing, finance and community investment.

00:04:33:18 - 00:04:56:11
Cas Piancey
I am stuck on those two points, by the way, like since I found out that the Federal Home Loan Banks gave Silvergate $4.3 billion, they're called advances. They're loans that people like you and I cannot get because they're at better rates than you and I could ever get, even if we had perfect credit. They're going on international markets and getting the best rates they can possibly get.

00:04:56:11 - 00:05:27:26
Cas Piancey
But these guys they went to, there's 11 banks. One of them is in San Francisco, Silvergate went over to the FHA bank of San Francisco and said, please, we need a $4.3 billion advance because essentially it looks like we're getting a bank run here. And the FHA bank of San Francisco gave them this $4.3 billion advance when I looked at the ten K, because all of these banks are actually registered with the securities and Exchange Commission, the whole concept is kind of weird.

00:05:27:26 - 00:05:53:14
Cas Piancey
When I let me backtrack here, get into the collapse of these banks throughout the yeah, there's 11 of these banks throughout throughout the country. They work as a cooperative and they were established in the wake of the Great Depression to kind of ensure that people were able to still get loans, to get a home, to build a, you know, a city hall to whatever it it may be for their community.

00:05:53:14 - 00:06:16:04
Cas Piancey
The designation of these banks was supposed to be, okay, we're going to help them do that. Now, at some point, things definitely got out of control because by by the 1980s, when we were in the midst of what was called the Savings and Loan Savings and Loans crisis, the SNL crisis, it was clear that the FHA banks had experienced some sort of regulatory capture because they they were torn apart.

00:06:16:04 - 00:06:48:02
Cas Piancey
There was a bank board that was ended. They stopped the bank board. There was no more bank board after this. And instead, two different entities took over, one being the Office of Thrift Supervision and the other being the Federal Housing Finance Board. Ultimately, we had another issue with regulatory capture, because those the Office of Thrift Supervision was merged and the FHA, FHA, the Federal Housing Finance Agency took over in regulating these banks.

00:06:48:09 - 00:07:14:17
Cas Piancey
It seems like now that definitely didn't work because, well, maybe and maybe you want to talk about this, somebody who is a chair, I don't know if it's for the San Francisco branch or if it's for the entire cooperative of banks here. But somebody was involved with us and works for these banks. Now, who knows whether that means they recused themselves if they weren't a part of this loan process?

00:07:14:17 - 00:07:18:09
Cas Piancey
I mean, I hope so. But it's a weird coincidence, I guess.

00:07:18:09 - 00:07:29:28
Bennett Tomlin
Yeah. I remember seeing that yesterday in certainly finding it unusual that it was one of the board members. US was also like a board member at one of these banks.

00:07:30:06 - 00:07:59:29
Cas Piancey
A vice chairman of one of these banks. So he was he was the chairman of the board at us and a vice chair for either San Francisco or just the whole thing. And either way, that just is it's just a really bad look that one of the main banks for FTX were instantly go to this thing that nobody has really heard of or understands much about to receive a 4.3, let's call it a loan, because that's what it is.

00:07:59:29 - 00:08:36:09
Cas Piancey
It's not an advance. They they get a $4.3 billion loan from this governmental agency that hardly any of us are aware of and definitely not for home like home purposes, not for community building. So I'm confused. What is the purpose here? So, I mean, I'm glad it stumped you, to be quite honest. I'm glad it stumped you because it doesn't make any sense.

00:08:36:09 - 00:08:56:01
Bennett Tomlin
And like several parts of this mechanism are weird, like when I was doing not super extensive research on this, but when you first sent it to me and I started reading it several parts for weird, like how you have to buy stock in the cooperative in order to like gain access to the credit. Like if I saw that mechanism in an algorithmic stablecoin, I would go, Oh, that looks fragile.

00:08:56:08 - 00:09:25:22
Bennett Tomlin
That looks like the part of this thing that's going to break my understanding that was the way they contribute to home and things like that was because they are effectively creating or they're buying up a whole bunch buying, originating, whatever, a bunch of mortgages and using those to create a line of cash flow. And then in exchange for a claim against the assets of these member banks, they're then able to extend advance the expected income from the mortgages rate.

00:09:25:28 - 00:09:37:26
Cas Piancey
Isn't that additionally traditionally, but it's not like Silvergate is doing a bunch of home loans. It's not like Silvergate is contributing to the La Jolla area significantly, you know what I mean?

00:09:38:03 - 00:10:08:11
Bennett Tomlin
Yes. And there was a post on American Banker, I think kind of still explains the way they would justify this to themselves, where they're talking about how this cooperative of these banks effectively when they extend these advances, get a lean against the assets of the bank itself, that is higher in priority than like even the FDIC. And so if any of these banks are unable to pay back their loans, they're able to effectively step in and strip all these assets out of the bank before the FDIC comes in and then has to fill up the rest.

00:10:08:11 - 00:10:26:02
Bennett Tomlin
And so there are people who have argued that the existence of this cooperative has effectively created this moral hazard where this group of banks is incentivized to extend more of these loans because they have this such they have such this premier position in the stack if something goes wrong with the bank.

00:10:26:02 - 00:10:52:26
Cas Piancey
From what I noticed, from what I saw, I only looked at San Francisco, but from what I saw, the amount of billions of dollars that they're extending to banks, it's actually for San Francisco, let's say. I think it was something in in during 2020. Right. So the only two years that I saw were 2020 and 2021. They don't have 2022 out yet, but 2020 had a significant uptick in advances that they gave out.

00:10:52:26 - 00:11:12:21
Cas Piancey
But I think that was something still in the in the realm of, I don't know, 25 billion, something like that. And then it came down in 2021 to like 16 billion. And I suspect that it's going to go back up for 2022 because we have a down market and all that. But either way, let's say it jumps back up to 25 billion or 35 billion no matter what.

00:11:12:21 - 00:11:38:04
Cas Piancey
Right. Let's say it's something in that range. A $4.3 billion loan to one entity is like a significant chunk of those advances and the way it works, by the way. So there's these 11 banks that work together. This loan is extended via the Bank of San Francisco, the Federal Home Loan Bank of San Francisco. And there they are, the main bank responsible for this advance.

00:11:38:11 - 00:12:00:21
Cas Piancey
But ultimately, it's all 11 banks that have to deal with this. So if they can't recoup their losses, ultimately, all 11 of these cooperative banks have to put that bill. Now, like you said, they say that has never, ever had to happen. They've never had to deal with this. They haven't lost money. Hard to believe. But okay. And I don't know, like I.

00:12:00:28 - 00:12:27:23
Cas Piancey
I find the whole network to be easily captured, regulatory and to be very opaque, despite the fact that we have these these SEC filings and these other these other things, like the idea that I just need to buy some stock as a bank or a credit union to get extended in advance. I, i it's.

00:12:27:23 - 00:12:28:08
Bennett Tomlin
It feels strange.

00:12:28:08 - 00:12:48:01
Cas Piancey
It feels know, sounds like money laundering. It almost sounds like I'm talking describing money laundering like I'm, I'm like, confused how that could be so simple, but that's fine. Whatever. Okay, great. What do we think happens next? I think is the question for Silvergate. Right. So they've been they've been extended this massive loan from the federal home Loan Bank of San Francisco.

00:12:48:01 - 00:13:01:04
Cas Piancey
Generally, you have a year or two to pay these things off. I think it's not something that they need to worry about instantly, but it's not going to last forever either. What are we think is going to happen next? What's the what's are they saved? I think this might have saved them. I'm not sure.

00:13:01:04 - 00:13:25:00
Bennett Tomlin
I. Well, I mean, maybe. Right. Like hopefully we've set up our bank regulations in such a way that even this type of level of deposits being pulled out and assets being seized because Silvergate assets have now been seized as part of the FTX’s bankruptcy, the bank will still be able to tap liquidity and survive the thing. That's like the point of a lot of the stress testing in the building for resiliency.

00:13:25:00 - 00:13:57:09
Bennett Tomlin
And the fear would be that the continued limitations and Silvergate diminished ability to interact in a meaningful way with billions of dollars of crypto deposits makes them a less effective business, where eventually they are unable to drive enough profits or whatever to sustain them. One of the things that's still interesting to me, and I kind of hinted at this earlier when I was talking about how FTX is banking through Silvergate was done through an Alameda Research entity called North Dimension Inc. That's strange.

00:13:57:19 - 00:14:08:21
Bennett Tomlin
That feels like something that should not have happened. And so I am curious if Silvergate is going to end up getting pulled into any of the legal proceedings surrounding FTX because of that.

00:14:08:21 - 00:14:34:02
Cas Piancey
I do want to propose that there's this is not this might be a symptom of the financial system that we live in as well, where I think a lot of people would tell you it's pretty normal for conglomerates, massive businesses, these these things to have 100 subsidiaries at different subsidiaries and doing different things. And if they need to get loans via their subsidiaries as opposed to the main company, that's nothing particular really weird.

00:14:34:02 - 00:14:47:16
Cas Piancey
But again, I think that is a symptom of the world that we live in. That's not to say that I think it's acceptable. I think it's not acceptable. I also think that they're right when they say this happens with a lot of businesses.

00:14:47:16 - 00:15:05:21
Bennett Tomlin
So I think you're probably right that there's a lot of businesses that use a lot of subsidiary is in a lot of jurisdictions for a lot of different reasons. I think the difference in this case is that they were moving money and there's a lot of extra regulations and like what you need to be doing if you're moving money, right.

00:15:05:28 - 00:15:33:04
Bennett Tomlin
And so like the fact that they saw presumably deposits and withdrawals that look like an exchange going to what was supposed to be, well, either an electronics importer exporter or an over-the-counter trading desk, depending on what you think. North Dimension Inc was that Silvergate thought those flows were the same, is strange, and like the fact that they were in a sense facilitating whatever behavior Alameda and FTX was engaged in there.

00:15:33:04 - 00:15:57:14
Cas Piancey
Really interesting point that you're making because I spoke to Frances Coppola today, who we have previously had on the on the show. She talked to us about banking. So she is generally a good person to reach out to about this stuff. And she directed me to a bank called ABLV Bank, which I don't know if you're familiar with Bennett, but but if you are, I'm going to just explain this regardless so that because I was not aware of them until today.

00:15:57:14 - 00:16:25:17
Cas Piancey
So she she described something called ABLV, which was a bank in Latvia that was established in 1993, essentially right after the fall of the Soviet Union, and was pretty much designed only to avoid sanctions for Russian nationals and was continually doing it continually ignoring sanction directions from the U.S. Treasury continual just disregarding everything U.S. regulators were trying to tell them to do.

00:16:25:17 - 00:16:48:25
Cas Piancey
Right. And they this cost them everything. So what ended up happening in 2018, the Treasury said, okay, we're not fucking around anymore. Enough of this bullshit. You get no U.S. dollars, you get none. No more U.S. dollars go into or out of your bank and we're going to find anyone who does. We're going to crucify you if you give ABLV any money.

00:16:49:01 - 00:17:12:23
Cas Piancey
And guess what happened? They went out of business. It was that easy. And so and I think some correspondent banks got in trouble for for helping them do this, which is what we're going to be seeing. I suspect with Silvergate and Signature and Metropolitan and Evolve and got it added like we could name 500 of these stupid banks that have now gotten involved in cryptocurrency.

00:17:12:29 - 00:17:29:22
Cas Piancey
But I do think we're not going to see prison time. We're going to see any of that stuff. Some of them are going to go out of business and some of them are going to get fined too. Good God, hell so they know never ever to do this again. And cryptocurrency becomes untouchable. Untouchable for a lot of these these banks, not every bank, but a lot of banks.

00:17:29:22 - 00:18:09:02
Bennett Tomlin
On that note, I think Metropolitan is in a little bit of a different category than Silvergate and Signature because they've been reducing their crypto business and just finally announced that they had ditched their last say, several hundred million in deposits as an exact number. I don't have it written down, but it was less than a billion. I'm pretty sure that they had left over this last quarter and that they were done with the business and the precipitating event or one of the precipitating motivations, I think, for this might be that on January 3rd, the Office of the Comptroller of Currency, the Federal Reserve and the FDIC issued a joint statement reiterating to banks the things

00:18:09:02 - 00:18:42:05
Bennett Tomlin
they need to be aware of if they're going to be engaging with the crypto space. And I think the list of things that are highlighted in this statement really kind of give you a little bit of insight into how these regulators are interpreting crypto right now. They warn of like the obvious things, like there's a risk of fraud and scams, that there are legal uncertainties related to custody and ownership, but they also say in more in these companies that some of these crypto companies who are using them are making inaccurate public statements about FDIC insurance and that the banks who are serving them need to be aware of that.

00:18:43:00 - 00:19:11:26
Bennett Tomlin
They also reiterate that like any banks that are holding assets for stablecoins need to be aware that Stablecoins as a structure may be vulnerable to a run which can lead to a huge outflow in deposits from the bank that's holding the Stablecoins assets. They also then like reiterate that there is a large contagion risk in the ecosystem because of how interrelated these entities are and how much is shared between these different cryptocurrency companies.

00:19:12:12 - 00:19:42:13
Bennett Tomlin
And one of the things that I really want to bring attention to that they say, is that they basically tell them that engaging with cryptocurrencies that are on public blockchains is not going to be appropriate. They say issuing or holding as principal crypto assets that are issued, stored or transferred on an open, public and or decentralized network is highly likely to be inconsistent with safe and sound banking practices.

00:19:43:16 - 00:20:07:17
Bennett Tomlin
They are telling these banks they should not be holding cryptocurrencies and that and like they are really emphasizing that. And then they go on to specifically say the agencies have significant safety and soundness concerns with banking models that are concentrated in crypto asset related activities that Silvergate and Signature. They are like drawing.

00:20:07:19 - 00:20:10:02
Cas Piancey
Moonstone and Evolve. Yes, but they're like.

00:20:10:02 - 00:20:28:06
Bennett Tomlin
Drawing a circle around the activity of these so-called cryptocurrency banks and saying, we don't think that's what you're supposed to be doing. And like the knock on effect of this is that we're going back to like how hard it was for cryptocurrency companies to find banking in 2017. And I expect we're going to see them all come back to their same shenanigans, meaning.

00:20:28:06 - 00:20:46:22
Cas Piancey
I don't know if we did we mention I suspect we mentioned this already last time where it's like, oh, wow, you think this is new, that that these banks are freaking out and running away from all of these cryptocurrency companies? No, no, no. I no know like 2017. That's how Bitfinex got screwed. That's how tether got screwed. That's how all these companies started.

00:20:46:29 - 00:21:10:26
Cas Piancey
Essentially having nowhere to go. And there's a chicken and egg game here that cryptocurrency advocates and critics and skeptics like us play, where it's like on one hand, they say, well, the reason they do these shenanigans with all this money is because they can't get banking. And then we, on the other hand, are saying, well, if they didn't do all these shenanigans, maybe they could get banking.

00:21:11:13 - 00:21:40:17
Cas Piancey
So it's it's a bit of a cat and mouse, chicken and egg, who knows what's the right answer here. But we have seen this before. And I do want to while you were talking, it reminded me that we had seen in August of 2020 to now, six months ago, just crazy, crazy how time flies that Brett Harrison, who was the president of us, had written this tweet saying we are FDIC insured.

00:21:40:22 - 00:22:00:13
Cas Piancey
And the FDIC almost instantly came down on him and said, you are not FDIC insured. You delete that tweet right now. You make sure that everyone understands that you are not FDIC insured and and make sure that we have nothing to do with you anymore. Don't mention us. And he had to come out and apologize and they cleared that up.

00:22:00:13 - 00:22:28:05
Cas Piancey
But like the FDIC has never fucked around with this stuff. The FDIC is they were one of the first regulators that I was very proud of what they were doing to try to the way people discuss wanting the SEC to regulate versus litigate. That is what the FDIC did. They were like, stop doing that right now. And if you keep doing it, you're going to get in big fucking trouble.

00:22:28:09 - 00:22:52:04
Cas Piancey
Stop. And lo and behold, here we are. A lot of these guys didn't stop. And here we go. Now you're in trouble. And it's not just with the FDIC, it's with everybody. So I I'm glad on one hand, I'm glad we're seeing this now. On another hand, I'm sorry that this is happening and it's unfortunate that it has had to come to this, I guess is what I is what I would say.

00:22:52:26 - 00:23:17:16
Bennett Tomlin
Yeah, absolutely. And it's one of the last things I want to kind of put a note on in that like lists of risks was the susceptibility of Stablecoins to run Signature to which we've been talking about a bunch in this episode was or at one point had a whole bunch of Circle's deposits there for USDC. And so that again feels like them saying, Hey, we're aware of what you're doing.

00:23:17:22 - 00:23:20:26
Bennett Tomlin
Here's our statement. Do you want to self-correct or do you want the other.

00:23:20:26 - 00:23:47:03
Cas Piancey
Option Signature, which was trading at roughly 300 and let's see what that is, $370 ish for its all time highs now trading at $117. So also doing significantly bad. So seriously having some issues. We don't know what this means. I want to make sure everyone understands that we are not lawyers, we are not hell, we're not doctors. We're not we're nothing.

00:23:47:03 - 00:24:08:25
Cas Piancey
We're nothing, we're nobody. We're commentators and we don't want anybody to take what we're saying to mean that they should be worried about having money on any of these platforms. That is not at all what we're saying. I'm not trying to imply that at all. I'm not trying to suggest be scared. Get your money out like no, I just think that these are concerns to look out for, think about, consider.

00:24:09:01 - 00:24:15:01
Cas Piancey
And as an industry, this is something that we need to be thinking about and be concerned about.

00:24:15:01 - 00:24:23:13
Bennett Tomlin
And if you're over the FDIC insured limit, it can always be valuable to consider diversifying the places you're storing your cash.

00:24:24:11 - 00:24:48:26
Cas Piancey
Hopefully, most people already know that. But yes, I think that's a good point to make, and I think that's a good point for us to actually end on for this episode. Quick episode about banking, which is definitely not involved with cryptocurrency at all. It's a totally different ecosystem. So yeah, thanks everybody. Hit the like unsubscribe button if you want to finally see Cass Coin Dao, we're going to try to buy a U.S. federally chartered bank.

00:24:48:26 - 00:25:05:07
Cas Piancey
Baby. Let's do this, guys. We're going to. We're going to buy a bank. We're going to get banking for CasCoin, and then we're going to then we're going to leave the United States of America and get raided. But that's for another time anyway. Yep. Take care, everybody. Thank you.