[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 “war on crypto” that blocked that
otherwise-legal industry from acquiring the banking services it
needs.]
[[link removed]]

HOW THE WAR ON CRYPTO TRIGGERED A BANKING CRISIS  
[[link removed]]


 

Ellen Brown
May 2, 2023
CounterPunch
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_ 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 “war on crypto” that blocked that
otherwise-legal industry from acquiring the banking services it needs.
_

, Cover art/illustration via CryptoSlate

 

According to an article in _American Banker_ titled “SEC’s
Gensler Directly Links Crypto and Bank Failures
[[link removed]],”
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:

[Crypto companies] have chosen to be noncompliant and not provide
investors with confidence and protections, and it undermines the $100
trillion capital markets …

Silvergate and Signature [banks] were engaged in the crypto business
— I mean some would say that they were crypto-​backed …

Silicon Valley Bank, actually when it failed, saw the country’s —
the world’s — second-leading stable coin had $3 billion involved
there, depegged, so it’s interesting just how this was all part of
this crypto narrative as well.

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 “war on crypto” that blocked that otherwise-legal
industry from acquiring the banking services it needs.

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.

THE WAR ON CRYPTO

In a February 2023 article on _Pirate Wires_ titled “Operation Choke
Point 2.0 [[link removed]],”
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
“Did the Government Start a Financial Crisis in an Attempt to
Destroy Crypto?
[[link removed]]”, he writes:

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 …

The preponderance of public evidence suggests that Silvergate and
Signature didn’t commit suicide — they were executed.

In January 2023, … [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.

He observes that banking crypto firms wasn’t 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:

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.

Carter observes that the distress in the banking sector was caused by
the Fed’s 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,
“the foundational collateral asset of the financial system,”
radically depreciated, causing $620 billion in unrealized losses
collectively to U.S. banks. “But,” he writes, “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. … 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.”

The most visible smoking gun, says Carter, was the decision to seize
Signature Bank:

On Sunday the 12th of March, Signature (SBNY) was abruptly sent
into FDIC receivership
[[link removed]] by 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. …

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 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).

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.

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-​Frank, and a Signature board member. He alleged
[[link removed]] that the
bank could have opened on Monday, and that leadership was shocked when
they were put into receivership. In an interview
[[link removed]] with
New York Magazine, Frank left “absolutely no doubt that the closure
was a political hit job, primarily motivated by a desire to send a
message to the crypto industry.” Carter observes:

As more data emerged, even the taciturn WSJ became convinced that
Signature was a political execution.

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. …

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. …
Shareholders who saw their equity wrongly vaporized should sue under
New York law.

He says that the upshot will be to drive crypto innovators abroad
[[link removed]].
In fact that move is happening already
[[link removed]].

KILLING CUSTODIA: A STATES’ RIGHTS ISSUE

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’s goal was
just to provide a secure onramp from dollars to cryptocurrencies and
an offramp back again. In fact, Custodia didn’t 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.

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 “Why Defending the Right of States to
Charter Banks Without Federal Permission Is Critical
[[link removed]],”
she writes:

Until a decade ago, it was unheard of that a bank would stop serving
entire groups of customers or the people in lawful — if
controversial — 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, legislative history
[[link removed]] shows
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-​specific insurance premiums and
overdraft restrictions.

The dual banking system – federal and state – 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:

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.

… Congress again respected the delicate balance in 1980 when it
further clarified the utility nature of the Fed’s role as payment
system operator by requiring the Fed to provide services to all
eligible banks on a non-​discriminatory basis
[[link removed]]. … In
denying payment system access to Custodia, the Fed cited Custodia’s
lack of FDIC insurance and lack of a federal regulator among
its reasons for denial
[[link removed]] and,
in doing so, the Fed improperly created for itself the unilateral
power to require all state banks to be both insured and federally
regulated.

Custodia sued the Fed, and the Attorney General of Wyoming, the state
chartering the bank, joined the lawsuit
[[link removed]].
The Attorney General noted in the filing that the Fed had created a
“Kafkaesque situation” where a Wyoming-​chartered bank is denied
access to the U.S. dollar payment system “because it is not
federally regulated, even while it is also denied federal
regulation.”

Five states have enacted bank charters that don’t require deposit
insurance or federal regulation –  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:

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

PUBLIC BANKS AND THE FDIC CONUNDRUM

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’s revenues compose the vast majority of its
deposits, and they must be deposited in the BND by law.

The state’s 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
“mini-Fed” for the state and its banks. That helps explain
why North Dakota has more local banks
[[link removed]] per
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.

UK Prof. Richard Werner recently published a briefing memo
[[link removed]] supporting
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.

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 noted by Julie
Andersen Hill
[[link removed]] in an
Iowa Law Review article, the Fed is “especially hesitant” 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, “The language and structure
of the Federal Reserve Act require that the Federal Reserve provide
payment services to all eligible banks.… If the Fed wants to exclude
banks, it should ask Congress to change the law.”

_This article was first posted on ScheerPost
[[link removed]].
_

_ELLEN BROWN is an attorney, founder of the Public Banking Institute
[[link removed]], and author of twelve books
including the best-selling Web of Debt [[link removed]]. Her
latest book, The Public Bank Solution
[[link removed]], explores successful public banking
models historically and globally. Her 300+ blog articles are
at EllenBrown.com [[link removed]]._

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