{"id":234519,"date":"2023-05-01T12:00:40","date_gmt":"2023-05-01T11:00:40","guid":{"rendered":"https:\/\/www.transcend.org\/tms\/?p=234519"},"modified":"2023-05-01T07:31:13","modified_gmt":"2023-05-01T06:31:13","slug":"how-the-war-on-crypto-triggered-a-banking-crisis","status":"publish","type":"post","link":"https:\/\/www.transcend.org\/tms\/2023\/05\/how-the-war-on-crypto-triggered-a-banking-crisis\/","title":{"rendered":"How the War on Crypto Triggered a Banking Crisis"},"content":{"rendered":"

29 Apr 2023 – <\/em>According to an article in\u00a0American Banker<\/em>\u00a0titled \u201cSEC\u2019s Gensler Directly Links Crypto and Bank Failures<\/a>,\u201d SEC Chair Gary Gensler has asked for more financial resources to police the crypto market. Gensler testified at an April 18 House Financial Services Committee hearing:<\/p>\n

[Crypto companies] have chosen to be noncompliant and not provide investors with confidence and protections, and it undermines the $100 trillion capital markets \u2026<\/p>\n

Silvergate and Signature [banks] were engaged in the crypto business \u2014 I mean some would say that they were crypto-\u200bbacked \u2026<\/p>\n

Silicon Valley Bank, actually when it failed, saw the country\u2019s \u2014 the world\u2019s \u2014 second-leading stable coin had $3 billion involved there, depegged, so it\u2019s interesting just how this was all part of this crypto narrative as well.<\/p><\/blockquote>\n

Cryptocurrency experts Caitlin Long and Nic Carter take the opposite view. They acknowledge the link between crypto and the recent wave of bank failures and the runs and threatened runs they triggered, but Carter and Long make a compelling case that it was the FDIC, the SEC and the Federal Reserve that brought the banks down, by a coordinated, extrajudicial \u201cwar on crypto\u201d that blocked that otherwise-legal industry from acquiring the banking services it needs.<\/p>\n

The public banking movement has run up against similar roadblocks. Both cryptocurrencies and publicly-owned banks compete with the Wall Street-dominated private banking cartel, but more on that after a look at the suspicious events behind the recent bank runs.<\/p>\n

The War on Crypto<\/strong><\/p>\n

In a February 2023 article on Pirate Wires<\/em> titled \u201cOperation Choke Point 2.0<\/a>,\u201d Carter laid out the case that the federal government was quietly attempting to ban crypto. In a 7,000-word March 23 follow-up titled \u201cDid the Government Start a Financial Crisis in an Attempt to Destroy Crypto?<\/a>\u201d, he writes:<\/p>\n

The two most crypto-\u200bfocused banks, Silvergate and Signature, were forced into liquidation and receivership, respectively. The established narrative is that they made \u201cbad bets\u201d and lost, or that they couldn\u2019t handle flighty depositors in the form of tech and crypto startups.<\/p>\n

But there\u2019s an alternative version of events being pieced together that is far more sinister \u2026<\/p>\n

The preponderance of public evidence suggests that Silvergate and Signature didn\u2019t commit suicide \u2014 they were executed.<\/p>\n

In January 2023, \u2026 [s]ome 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.<\/p><\/blockquote>\n

He observes that banking crypto firms wasn\u2019t prohibited. It was just made very expensive and reputationally risky, by burying the bank in paperwork and unpleasant interrogations from regulators. The Fed also made it clear that new crypto-focused bank charters would be denied. Silvergate, Silicon Valley Bank (SVB), and Signature were put out of business:<\/p>\n

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.<\/p><\/blockquote>\n

Carter observes that the distress in the banking sector was caused by the Fed\u2019s attempt to reverse the inflationary effects of excess government spending, particularly for COVID-19 relief, by rapidly raising interest rates. As a result, government bond portfolios, \u201cthe foundational collateral asset of the financial system,\u201d radically depreciated, causing $620 billion in unrealized losses collectively to U.S. banks. \u201cBut,\u201d he writes, \u201cthere\u2019s also a political subtext here. Most banks are now sitting on mark-\u200bto-\u200bmarket losses in their bond portfolios, but they\u2019re not facing runs from their clients. \u2026 Silvergate met its end because \u2014 well after the crypto credit crisis of \u201822 had concluded \u2014 its remaining depositors were cajoled and bullied into withdrawing their funds.\u201d<\/p>\n

The most visible smoking gun, says Carter, was the decision to seize Signature Bank:<\/p>\n

On Sunday the 12th\u00a0of March, Signature (SBNY) was abruptly sent into\u00a0FDIC receivership<\/a>\u00a0by the NYDFS [New York State Department of Financial Services]. 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. \u2026<\/p>\n

Almost immediately, we knew something was wrong. Signature was not a \u201ccrypto bank\u201d 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\u2019t 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 into 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).<\/p>\n

The only problem: based on what we know, it appears that Signature wasn\u2019t actually insolvent when they were nationalized and $4.3B of shareholder value was vaporized.<\/p><\/blockquote>\n

Carter writes that the crypto industry found an unlikely ally in Barney Frank, former chair of the House Financial Services Committee, the Frank in Dodd-\u200bFrank, and a Signature board member. He\u00a0alleged<\/a>\u00a0that the bank could have opened on Monday, and that leadership was shocked when they were put into receivership. In an\u00a0interview<\/a>\u00a0with New York Magazine, Frank left \u201cabsolutely no doubt that the closure was a political hit job, primarily motivated by a desire to send a message to the crypto industry.\u201d Carter observes:<\/p>\n

As more data emerged, even the taciturn WSJ became convinced that Signature was a political execution.<\/p>\n

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\u2019s collapse. \u2026<\/p>\n

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. \u2026 Shareholders who saw their equity wrongly vaporized should sue under New York law.<\/p><\/blockquote>\n

He says that the upshot will be to\u00a0drive crypto innovators abroad<\/a>. In fact that move is\u00a0happening already<\/a>.<\/p>\n

Killing Custodia: A States\u2019 Rights Issue<\/strong><\/p>\n

A second smoking gun was the denial of FDIC insurance to Custodia Bank, which had a 100%-reserve business model that would have cost the FDIC nothing and posed no risk to the public. Custodia\u2019s goal was just to provide a secure onramp from dollars to cryptocurrencies and an offramp back again. In fact, Custodia didn\u2019t need to ensure its deposits, because it would not have been making loans from them. It would have kept them in reserve for the depositors. The bank needed FDIC insurance only because without it, the Fed refused to give Custodia a master account, necessary to participate in the national payment system.<\/p>\n

Caitlin Long, the Wall Street veteran who founded Custodia, argues that this newly-imposed rule constitutes an unconstitutional violation of the long-standing right of states to charter their own banks. In an April 17 article titled \u201cWhy Defending the Right of States to Charter Banks Without Federal Permission Is Critical<\/a>,\u201d she writes:<\/p>\n

Until a decade ago, it was unheard of that a bank would stop serving entire groups of customers or the people in lawful \u2014 if controversial \u2014 industries. It was also unheard of that banks would be blocked from accessing either of the two federal utilities in the banking industry: (i) deposit insurance and (ii) the U.S. dollar payment system (which the FDIC and Fed operate, respectively). Indeed,\u00a0legislative history<\/a>\u00a0shows that Congress took great pains to keep the operation of these two utilities standalone and fully separated from the power to charter banks. As a check and balance, Congress wanted all chartering work done exclusively by the states or the lone federal agency that can charter banks, the OCC. Access to the two utilities was automatic for eligible banks, albeit with bank-\u200bspecific insurance premiums and overdraft restrictions.<\/p><\/blockquote>\n

The dual banking system \u2013 federal and state \u2013 goes back to the days of Abraham Lincoln, when the National Bank Act was passed. Before that, state-chartered banks were issuing their own currencies as paper promissory notes with their own names on them, an unstable system. The National Bank Act unified the country under a single paper currency, the U.S. dollar, by imposing a 10% tax on other bank-issued promissory notes. With the founding of the Federal Reserve in 1913, the U.S. dollar became the Federal Reserve Note. The national currency was federally issued but states retained the right to charter banks. As Long observes:<\/p>\n

Historically, states have acted as a check against federal overreach in banking. There is a key reason why: the mission statements of state banking agencies usually require them to support both safety and soundness AND economic development, while federal bank regulators do not have economic development within their wheelhouse. This creates a healthy tension and explains why innovation in banking often originates within the states. The Fed and FDIC have no veto power over state chartering decisions.<\/p>\n

\u2026 Congress again respected the delicate balance in 1980 when it further clarified the utility nature of the Fed\u2019s role as payment system operator by requiring the Fed to provide services to\u00a0all eligible banks on a non-\u200bdiscriminatory basis<\/a>.\u00a0\u2026 In denying payment system access to Custodia, the Fed cited Custodia\u2019s lack of FDIC insurance and lack of a federal regulator among its\u00a0reasons for denial<\/a>\u00a0and, in doing so, the Fed improperly created for itself the unilateral power to require all state banks to be both insured and federally regulated.<\/p><\/blockquote>\n

Custodia sued the Fed, and the Attorney General of Wyoming, the state chartering the bank,\u00a0joined the lawsuit<\/a>. The Attorney General noted in the filing that the Fed had created a \u201cKafkaesque situation\u201d where a Wyoming-\u200bchartered bank is denied access to the U.S. dollar payment system \u201cbecause it is not federally regulated, even while it is also denied federal regulation.\u201d<\/p>\n

Five states have enacted bank charters that don\u2019t require deposit insurance or federal regulation \u2013\u00a0 Connecticut, Maine, Nebraska, Vermont and Wyoming. Such uninsured banks are prohibited from lending; they must hold 100% cash to back customer deposits, plus up to 8% of deposits as an additional capital requirement. Long concludes:<\/p>\n

Congress tasked the Fed and FDIC with running utilities; it did not give the Fed and FDIC veto power over U.S. states \u2013 and, in turn, power to block the responsible innovations that state banking authorities create as they fulfill their economic development mandates.<\/p>\n

Public Banks and the FDIC Conundrum<\/strong><\/p>\n

The public banking movement is particularly geared toward local economic development. The stellar and only model in the U.S. is the Bank of North Dakota, formed in 1919 when local farmers were losing their farms to foreclosure by big out-of-state banks. With assets in 2021 of $10.3 billion and a return on investment of 15%, the BND is owned by the state, which self-insures it. There is no fear of bank runs, because the state\u2019s revenues compose the vast majority of its deposits, and they must be deposited in the BND by law.<\/p>\n

The state\u2019s local banks are also protected by the BND, which is forbidden to compete with them. Instead, it partners with them, helping with liquidity and capitalization. The BND has been called a \u201cmini-Fed\u201d for the state and its banks. That helps explain why\u00a0North Dakota has more local banks<\/a>\u00a0per capita than any other state, at a time when other states have been losing banks to big bank mergers, causing the number of U.S. banks to shrink radically.<\/p>\n

UK Prof. Richard Werner recently published\u00a0a briefing memo<\/a>\u00a0supporting the case for a public bank. It was prepared for the state of Tennessee, which is considering a sovereign state bank on the North Dakota model, but the arguments apply to all states. Benefits discussed include dividends, higher state-level tax revenues, greater job creation, greater local autonomy and resilience to shocks, more options for funding public sector borrowing and state pension funds, and protection of financial transaction freedom and privacy.<\/p>\n

The FDIC has not formally rejected insurance coverage for state-chartered publicly-owned banks, but regulators have intimated that it is not interested in covering them; and as\u00a0noted by Julie Andersen Hill<\/a>\u00a0in an Iowa Law Review article, the Fed is \u201cespecially hesitant\u201d to process payments without that coverage. Federal usurpation of state banking regulation not only drives cryptocurrency innovation abroad but kills innovation in local economic funding of the sort pioneered in North Dakota. Andersen Hill writes, \u201cThe language and structure of the Federal Reserve Act require that the Federal Reserve provide payment services to all eligible banks.\u2026 If the Fed wants to exclude banks, it should ask Congress to change the law.\u201d<\/p>\n

________________________________________<\/em><\/p>\n

\"\"<\/a> Ellen Brown is a member of the <\/em>TRANSCEND Network for Peace Development Environment<\/a>, an attorney, founder\/chairperson of the\u00a0<\/em>Public Banking Institute<\/a>, and author of thirteen books including\u00a0<\/em>Web of Debt<\/a>,\u00a0The Public Bank Solution<\/a>, and\u00a0<\/em>Banking on the People: Democratizing Money in the Digital Age<\/a>.\u00a0Her 300+ blog articles are at\u00a0ellenbrown.com<\/a><\/em><\/p>\n

\u00a0<\/em><\/p>\n

Go to Original \u2013 ellenbrown.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

29 Apr 2023 – Facts & Info – Expert Analysis<\/p>\n","protected":false},"author":4,"featured_media":179118,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[40],"tags":[232,354,562],"class_list":["post-234519","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-transcend-members","tag-capitalism","tag-economics","tag-finance"],"_links":{"self":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/234519","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/comments?post=234519"}],"version-history":[{"count":2,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/234519\/revisions"}],"predecessor-version":[{"id":234524,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/posts\/234519\/revisions\/234524"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media\/179118"}],"wp:attachment":[{"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/media?parent=234519"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/categories?post=234519"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.transcend.org\/tms\/wp-json\/wp\/v2\/tags?post=234519"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}