Regulators are closing banks and raising questions about neutrality
WASHINGTON, DC – OCTOBER 3: Federal Reserve Chairman Jerome Powell listens as the US … [+]
When three major US banks – Silvergate Bank, Silicon Valley Bank and Signature Bank – folded in the past two weeks, they had all experienced a run on deposits, but each was treated differently by regulators. These varying results for banks with a substantially similar problem have raised questions about regulators’ neutrality and judgment — and whether an expansion of regulatory authority is actually necessary or desirable to combat abuses in the “crypto industry.”
Indeed, the seemingly arbitrary exercise of state power in response to banks servicing this new industry brings into stark relief the value of a principled and politically neutral currency and payment network – bitcoin. In the coming years, it will be critical that both policymakers and the public can distinguish the genuine innovation that bitcoin represents from its many spinoffs and imitators, many of which have caused the “cryptocontagion” that has provoked a disjointed regulatory response.
Banking and regulatory discrimination
Silvergate Bank, one of the main banks serving the cryptocurrency industry, voluntarily ceased operations and is liquidating its assets after a barrage of regulatory scrutiny from the Justice Department and lawmakers, including Senator Elizabeth Warren, complicated its ability to secure a loan that would have allowed it to remain solvent. The episode raised questions about whether political interference played a role in Silvergate’s collapse.
The Federal Deposit Insurance Corporation (FDIC), the federal regulator of state-chartered banks, took over Silicon Valley Bank (SVB) and transferred all its deposits to a specially created “Bridge Bank”. The FDIC also took the historically unprecedented step of guaranteeing all of 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 with SVB
Ultimately, 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 the takeover. The closure of a solvent bank is also new and suggests that regulators may pick winners in the banking industry.
The “systemic risk exemption” invoked by the Treasury Department, the Federal Reserve and the FDIC to shut down Signature likely applied to its “Signet” product, a real-time payment platform that was one of the last places to bank cryptocurrencies after Silvergate’s shutdown. Former U.S. Representative Barney Frank, who authored the Dodd-Frank Act that increased oversight of the banking industry after the Great Financial Crisis of 2008, served on the Signature Board at the time of the 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 for regulators?
The demise of all three of these banks has one factor in common: increased regulatory scrutiny of the “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 that were already flagged for scrutiny under existing laws on securities, money transfer and campaign financing. But for regulators, the spectacular wipeouts of millions of retail investors have not meant taking stock of their own failures to effectively police criminal and suspicious activity. Instead, regulators have used their inaction and ineffective action over the past decade plus as practical justifications to further expand their power today.
On January 3, 2023, the Federal Reserve, OCC, and FDIC issued a joint letter discouraging banks from holding crypto or serving crypto clients. As US 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 released a statement praising the “banking agencies” for this “guidance” and urging Congress to “expand the power of regulators.”
These regulatory actions—without any congressional enactment or public debate—have already had a chilling effect throughout the industry. Many banks, including Signature, announced that they would either reduce or eliminate their dealings with crypto assets and clients in the crypto industry. This latest crackdown, and its effects, echoes New York State’s passage of the “BitLicense” law in 2015, which resulted in the exodus of at least ten bitcoin companies and discouraged newer crypto-focused companies from incorporating in the state.
From the rule of law to arbitrary rule
Many companies operating in the “crypto industry” have truly embodied the worst predatory corporate practices. However, regulatory responses to them have been largely ineffective; it has alternated between neglect, misunderstandings and cooperation. By allowing abuse to flourish for years and then engaging in sudden, discriminatory crackdowns, both New York State—arguably the most important 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 America’s approach to new payment 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 the principle for incoherence. This will have profound economic and political effects in the years to come.
The Bitcoin Alternative
Despite the escalating conflict between regulators and some financial services providers, the original innovation that spawned a legion of “crypto” imitators, bitcoin, is still working as well as ever. As a politically neutral, global open source protocol for transferring value, bitcoin continues to work 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 authorities, companies, the media and other institutions is at an all-time low. One of the most important of all social institutions is money itself – the language we use to exchange values. Bitcoin is an institution that does not 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 to restore 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 fix is here – and it’s gaining users every day.
