Six weeks ago, Pirate Wires published Nic Carter’s explosive Operation Chokepoint 2.0, laying out the case that the Biden Administration was quietly attempting to ban crypto. A month later, the US financial system was thrust into chaos after a series of historic bank failures, most notable among them Silicon Valley Bank. But the failures actually began a couple days earlier, after crypto-friendly Silvergate was targeted by the government. By the end of the following weekend the last-remaining crypto-friendly bank, Signature, was shut down under circumstances still unclear, and for some reason largely unreported.

In a bombshell new feature for Pirate Wires, Nic Carter returns: today, the entire global financial system teeters on the brink of a disaster created by the Fed.

-Solana

A bank run that began with a small Californian regional bank has now escalated into a worldwide crisis. As a response to the failures of Silvergate, Silicon Valley Bank, and Signature, the Federal Reserve prepared a veritable bazooka of new funding for financial institutions and reversed its plans to contract the money supply. Switzerland is busy negotiating the merger of two of its largest banking institutions, UBS and Credit Suisse. This represents the biggest challenge to financial stability since the Great Financial Crisis in ‘08 and a sea change in the structure of US banking. Attention has rightly been focused on the prospect of further runs and the knock-on effects of Fed policy on banking institutions. 

But lost amidst the chaos is another subplot: the escalating crackdown by the Federal government against a wholly legal US industry. A month ago, I warned that banks dealing with crypto clients were facing a concerted effort on the part of regulators and supervisors to redline the entire crypto space. What has happened since was utterly shocking. 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 — and convincing. It appears that these banks, especially Signature, were the victims of an opportunistic campaign to decapitate banks serving the crypto industry. Not only was the bank run opportunistically exploited by regulators to shut down Signature, but it may even trace its origins to Choke Point 2.0. Did the Biden Administration actually instigate the now-global bank run as part of a grievance campaign against the crypto space? If so, this represents a colossal scandal, and one that the Biden administration must be made to answer for.

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

In January 2023, it became clear that a new chapter had opened up in the Biden admin’s war on crypto. Some 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. 

These warnings were echoed by members of Congress like Sen. Hagerty, Rep. Davidson, and Whip Emmer. Subsequent efforts were made in a House hearing to determine whether the regulatory harassment is legal. 

It wasn’t just banking regulators either. In the last month, regulatory attempts to kneecap the crypto industry in the US escalated dramatically: 

• The SEC announced a lawsuit against the crypto infrastructure company Paxos for issuing the BUSD stablecoin. 

• Crypto exchange Kraken settled with the SEC for offering a staking product. 

• SEC Chair Gensler openly labeled every cryptoasset other than Bitcoin a security. 

• The Senate Committee on Environment and Public Works held a hearing lambasting Bitcoin for its environmental footprint. 

• The Biden admin proposed a bill that singles out crypto miners for onerous tax treatment. 

• The NY Attorney General declared Ethereum, the second-largest cryptoasset, a security. 

• The SEC continued its anti-consumer protection efforts by doubling down on their attempts to block a spot Bitcoin ETF in court as well as trying to stop Binance US from buying the assets of the bankrupt Voyager. 

• The OCC let crypto bank Protego’s application for a national trust charter expire without approval. 

• The SEC sent Coinbase a Wells Notice, indicating its intent to bring enforcement actions against them for a variety of their business lines. 

Most worryingly though, the situation for existing crypto-facing banks has gone from precarious to critical. In January, we already knew that banks were effectively barred from issuing stablecoins on a public blockchain, from holding cryptoassets directly, and were heavily discouraged from servicing crypto clients. We know now that regulators had verbally guided crypto-friendly banks in November to reduce their exposure to crypto firms to 15 percent of deposits, even though this was never made explicit in written policy (in practice, this means maintaining a ratio below 10 percent, to accommodate fluctuations in deposits). 

Any bank foolhardy enough to onboard crypto-focused firms would find itself buried in a mountain of paperwork and faced with unpleasant interrogations from regulators. Additionally, the Fed made it abundantly clear that new crypto-focused bank charters like that of Custodia (a fully reserved model, immune to bank runs!) would be denied, which is exactly what happened at the end of January. Banking crypto firms wasn’t prohibited, just rendered extremely expensive and reputationally risky. 

Over the last two weeks however, a bank run — initially encouraged and celebrated by progressives members of Congress — escalated into a full-blown banking crisis, forcing the Fed to step in and guarantee deposits at the banks in crisis. Once the dust had cleared, three banks were no more: Silvergate, Silicon Valley Bank (SVB), and Signature. Silvergate announced on March 8th its intention to wind down its operations in an orderly manner. That same week, SVB and Signature were put into FDIC receivership by the California Department of Financial Protection and Innovation and the New York Department of Financial Services (NYDFS), respectively, on Sunday night. The Fed stepped in, guaranteeing deposits at the imperiled banks, and creating a facility whereby extant banks could borrow against assets at par that were trading at discounted valuations. This largely halted the slide, although I do expect that we will see a slow bleed out of community banks and significant consolidation in the financial sector over the next year. There’s no reason any longer to place deposits in the hands of a smaller community bank that is vulnerable to runs, especially given Janet Yellen’s unsettling admission that the Treasury would only step in to support large, ‘systemic’ institutions. 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. 

It’s worth briefly examining why some of these banks were distressed in the first place. This has been ably covered elsewhere, but the ultimate cause is simple enough to diagnose. The US government has been engaged in massive deficit spending in recent years, particularly in the context of Covid and the stopgap measures such as the CARES act, rivaling spending levels reached during WWII. This fiscal impulse predictably manifested as the highest inflation since the 80s, requiring the Fed to mechanically raise rates — extraordinarily rapidly — in order to bring inflation back down in line with its mandate. Mathematically, high rates cause bonds to depreciate, especially longer-dated ones. As a result, the performance of government bond portfolios last year, which serve as the foundational collateral asset of the financial system, was the worst in recorded history. US banks held a lot of these bonds, and collectively suffered $620B in unrealized losses as a consequence. 

This became a problem when some of these banks started to suffer outflows, forcing them to lock in these unrealized losses. Some of these banks realized their predicament, and as they took measures to raise capital, the market realized that they were impaired, and depositors fled, causing an escalating crisis. Since depositors are unsecured creditors with no upside and high downside, the rational move in a bank run is to pull your funds first and ask later, and this is what happened. 

The bank run isn’t worth dwelling on, aside from making the point that catalysts should not be confused with ultimate causes. VCs (correctly) telling their startups to reduce their SVB exposure were not the cause of the SVB run. (Shouting “fire” in a movie theater isn’t morally blameworthy when there really is a fire.) Nor were the “risky bets” made by SVB leadership (their portfolio was completely ordinary, and raised no red flags among their regulators or ratings agencies). ‘Systemic risks introduced by crypto’ certainly weren’t the cause either, as all of the affected banks had survived the 2022 crypto market selloff and were still in business as of Q1 2023. Nor was loosening of Dodd-Frank coverage of regional banks, as the 2022 Federal Reserve stress test’s baseline and “severely adverse scenario” did not contemplate a 25 percent annual drop in the price of long term Treasuries. The ultimate cause of the collapses was not Peter Thiel, David Sacks, or a loosening of Dodd-Frank, but rather the massive spending spree of the Trump and Biden admins and the resultant inflation, which forced the Fed to hike rates dramatically. 

After suffering irrecoverable setbacks, crypto-friendly bank Silvergate announced in early March its intent to wind down its operations in an orderly manner. As we know, the bank’s announcement called attention to the much broader and widespread problem of losses in bank held-to-maturity portfolios, catalyzing a massive bank run which brought down SVB and Signature (more on them later), and spread to Europe, dooming megabanks like Credit Suisse. But let’s dwell on Silvergate for a bit. 

Plenty of analysts have already explained in detail how exactly Silvergate met its demise. In short, it accepted deposits from crypto firms, plowed those deposits into bonds with long maturities when rates were low, suffered a loss on those bonds when rates rose, and were forced to realize those losses when their crypto clients demanded their money back, all at once. The combination of rising rates and the selloff in crypto — which caused clients to withdraw en masse — was too much to bear. And this is a perfectly suitable mechanical explanation of how Silvergate was forced to close down and voluntarily liquidate.  

But 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. And indeed, Silvergate managed to survive a 70 percent redemption of client assets over the course of 2022 before they were wiped out in 2023. 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.

Depositors don’t just desert banks abruptly. They need a good reason to. In this case, a combination of targeted regulatory pressure and political bullying did the trick. Here’s what happened.

First, Silvergate was in a fundamentally fragile position because banks were being dissuaded from engaging with crypto by regulators. As a consequence, crypto firms had few other choices with regards to crypto banking, so Silvergate — as the main crypto-friendly bank — was flooded with their deposits. This structural vulnerability was the direct result of the harassment levied by regulators against banks daring to service crypto clients. Ordinarily, an industry would be served by a wide variety of banks, reducing the exposure of any given bank to the sector. But because banks have generally been discouraged from touching crypto, deposits crowded into the small handful willing to bear the risks. 

The reason that normal banks didn’t want to service crypto was because it would expose them to reputational costs and additional overhead (like stepped up KYC obligations and higher insurance premia) that were simply not worth it. Thus, the task was left to a small handful of banks — primarily Silvergate, Metropolitan (before they closed their crypto practice), and Signature. Silvergate and Signature administered critical infrastructure in their SEN and Signet networks, which allowed crypto firms to move dollars around quickly. So as of early 2023, Silvergate and Signature were quite exposed to the crypto space — and partly this was due to the fragilization brought on by the regulatory ringfencing.

Second, and this is no secret, bank regulators, but in particular the FDIC, dramatically increased the level of oversight on these banks around the turn of the year. Bank executives inform me now that they are forced to clear all new crypto clients proactively with the FDIC. This naturally puts a massive damper on any bank’s enthusiasm to support clients engaged in crypto activities. And it’s worth noting that the current FDIC chair, Martin Gruenberg, was the man responsible for Choke Point 1.0 from 2013 to 2017. His nomination for a second FDIC term under Biden was met with some protest at the time, but this wasn’t an issue in his confirmation. Obviously, he knows the Choke Point playbook inside and out. Against this backdrop, onboarding more crypto clients has become more costly and difficult, hindering the acquisition of new deposits.

Additionally, post FTX, several investigations were launched aiming to tie Silvergate to wrongdoing at FTX and Alameda. Silvergate, by all accounts, was a victim of Sam Bankman-Fried’s fraud, just as anyone else was. Aside from their FTX and Alameda ties, there is not yet public evidence that Silvergate’s AML and KYC vendors and practices materially differed from other banks, or whether SBF affiliates were able to get accounts at other US banks. Rather than pursuing a broad investigation of SBF ties throughout the banking system, federal investigators took a different tack, focusing specifically on Silvergate, and asserting the bank’s culpability in the matter. The reality of whether Silvergate did experience compliance failures, or whether they were simply lied to by a very effective conman will be revealed in time. In DC, the conclusion was already presumed: Silvergate was complicit, rather than merely a victim.