When three major U.S. banks—Silvergate Bank, Silicon Valley Bank, and Signature Bank—shut down over the past two weeks, they had all experienced runs on deposits, but each was treated differently by regulators. These varying outcomes for banks with a substantially similar problem have led banking industry leaders, former regulators, and U.S. Senators to question regulators’ neutrality and judgment.
Indeed, the seemingly arbitrary exercise of state power in response to banks serving this new industry brings into stark relief the value of a politically-neutral currency and payments network—bitcoin. In the years to come, it will be critical that both policymakers and the general public can separate the genuine innovation that bitcoin represents from its many spinoffs and imitators, many of which caused the so-called crypto contagion that has invoked an incoherent regulatory response.
Bank Runs And Regulatory Discrimination
Silvergate Bank, one of the most important banks serving the cryptocurrency industry, voluntarily ceased operations and is liquidating its assets after a barrage of regulatory scrutiny from the Department of Justice and lawmakers, including Sen. Elizabeth Warren, complicated its ability to secure a loan that would have enabled it to remain solvent. The episode raised questions about whether political interference played a role in Silvergate’s collapse.
The Federal Deposit Insurance Corporation, the federal regulator of state-chartered banks, took over Silicon Valley Bank and transferred all of its deposits to a specially-created “Bridge Bank”. The FDIC also took the historically unprecedented step of guaranteeing all of the Bridge Bank’s deposits—insured and uninsured, existing and new. As Silicon Valley Bridge Bank’s new CEO, Tim Mayopoulos, pointed out, this “means that deposits held with SVB
Finally, Signature Bank was shut down by the New York State Department of Financial Services, and its assets were also seized by the FDIC. However, unlike Silvergate and SVB, Signature was still solvent at the time of its takeover. The shutdown of a solvent bank is also new and suggests that regulators may be picking winners in the banking industry.
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The “systemic risk exception” invoked by the Treasury, Federal Reserve, and FDIC to shut down Signature likely pertained to its “Signet” product, a real-time payments platform that was one of the last places to bank cryptocurrencies after Silvergate’s closure. Former U.S. Representative Barney Frank, who authored the Dodd-Frank Act that increased oversight of the banking industry after the 2008 Great Financial Crisis, served on the Board of Signature at the time of its takeover. Rep. Frank said, “regulators wanted to send a very strong anti-crypto message. We became the poster boy because there was no insolvency based on the fundamentals.”
Regulatory Failures: More Power To Regulators?
The demise of all three of these banks has one factor in common: increased regulatory scrutiny of the so-called crypto industry in the wake of the failures of a number of high-profile crypto exchanges in 2022. Many of these exchanges engaged in activities already flagged for scrutiny under existing securities, money transmission, and campaign finance laws. But for regulators, the spectacular wipeouts of millions of retail investors has not meant taking stock of their own failures to effectively police criminal and suspicious activity. Indeed, sources suggest that Chairman of the Federal Reserve Jerome Powell blocked language suggesting potential regulatory failures in the joint statement about the SVB rescue plan issued by the Fed, FDIC, and Treasury on March 12th.
Instead, regulators have used their inaction and ineffective action over the past decade plus as convenient justifications for further expanding their power today. On January 3, 2023, the Federal Reserve, OCC, and FDIC issued a joint letter discouraging banks from holding crypto or servicing crypto clients. As U.S. Representative Tom Emmer pointed out in a letter to the Chairman of the FDIC, the Federal Reserve then published this guidance in the Federal Register without following typical administrative procedure, which requires public comment. In the same timeframe, the White House issued a statement praising the “banking agencies” for this “guidance” and calling on Congress to “expand regulators’ powers”.
These regulatory actions—absent any law from Congress or public debate—have already had a chilling effect across the industry. Many banks, including Signature, announced that they would either significantly curtail or eliminate their dealings with crypto assets and customers in the crypto industry. This most recent crackdown, and its effects, echo the State of New York’s passage of the “BitLicense” law in 2015, which resulted in the exodus of at least 10 bitcoin companies and discouraged newer crypto-focused companies from incorporating in the State.
From the Rule of Law To Inconsistent Rule
Many companies operating in the crypto industry have indeed embodied the worst of predatory corporate practices. However, the regulatory response to them has been largely ineffective; it has alternated between neglect, misunderstanding, and collusion. By allowing malfeasance to flourish for years and then engaging in sudden, discriminatory crackdowns, both the State of New York—arguably the most significant jurisdiction for financial regulation in the United States—and the U.S. Federal Government are signaling to global markets that there is little coherence in the U.S. approach to new payments technologies.
Naturally, nothing spooks markets more than inconsistency and arbitrariness. The recent bank closures suggest that the United States, a country that once led the world in well-regulated markets and the rule of law, has traded principle for incoherence. This will have profound economic and political effects in the coming years.
The Bitcoin Alternative
Despite the escalating standoff between regulators and some financial services providers, the original innovation that spawned a legion of crypto imitators, bitcoin, still functions as well as ever. As a politically-neutral, global, open source protocol for the transfer of value, bitcoin continues to function with or without banks. Bitcoin is built and maintained by volunteers; it has no CEO, Board, or organization behind it that can be targeted or shut down.
Today, trust in government, corporations, the media, and other institutions is at a historic low. One of the most important of all social institutions is money itself—the language we use to transact value. Bitcoin is an institution that doesn’t discriminate; anyone can use it to send, store, and receive as much or as little as they choose. For this reason, bitcoin can act as a neutral foundation on which to re-establish trust in institutions so that the United States can continue to build on its past economic and political success.
The recent politicized targeting of specific banks by federal and state regulators suggests that the government may have overstepped its authority. The correction is here—and it’s gaining users every day.
