Like the day is followed by night, we can count on politicians piling on a debacle when they can craft a sound bite that fits their desired narrative.
As was reported yesterday, Silvergate Capital Corporation (NYSE:SI) has decided to wind down its operations following the collapse of its crypto services – once a prominent portion of the bank’s business and today no more.
Yet while crypto contagion and the failure of firms like FTX may be a catalyst to the demise of Silvergate Bank, ultimately, it was not the cause, according to multiple digital asset experts. This is contrary to statements made by several prominent US Senators.
Caitlin Long, a digital asset entrepreneur, crypto proponent, and former investment bank executive, commented on a statement by Senator Sherrod Brown, reflecting on the Silvergate collapse.
.@SenSherrodBrown on Silvergate's failure: pic.twitter.com/b5zStZiVIj
— Leo Schwartz (@leomschwartz) March 8, 2023
Senator Brown, Chair of the Senate Banking Committee, said that FTX’s collapse continues to “ripple outward” when a bank is “overreliant” on crypto.
Long provided a brief education to the Senator, stating:
“… you’re wrong [Senator Sherrod Brown] that #crypto triggered Silvergate’s issue. What did it was $13.3bn in demand deposits that depositors cld withdraw in minutes, but only $1.4bn of cash. Had $SI held $13.3bn of cash, the bank run wouldn’t have impaired its capital. Not a crypto prob…”
Long added:
“When a bank w/ highly volatile deposits makes a levered investment in 10-year bonds into a Fed tightening cycle, what happens when a bank run hits is predictable—liquidate those bonds at a loss, impairing the bank’s capital. It’s an indictment against fractional-reserve banking.”
She said this is exactly what her digital bank Custodia proposed to fix – which was blocked by federal regulators.
— Caitlin Long 🔑⚡️🟠 (@CaitlinLong_) March 7, 2023
Ram Ahluwalia, a well-known Fintech entrepreneur and crypto expert, slammed Senator Elizabeth Warren’s statement on Silvergate’s failure. Senator Warren is a member of the Senate Banking Committee and has long opposed digital asset innovation.
Senator Warren stated:
“As the bank of choice for crypto, Silvergate Bank’s failure is disappointing, but predictable. I warned of Silvergate’s risky, if not illegal, activity—and identified severe due diligence failures. Now, customers must be made whole & regulators should step up against crypto risk.”
Ahluwalia said, “the Senator’s allegations should not be used to justify the destruction of a Federal Reserve member bank in a 120-character Twitter thread.”
He added:
“Silvergate, the first crypto bank, faced a bank run that led to its downfall. Despite facing allegations around AML, it was not these issues that ultimately caused the demise of $SI. The responsibility for bank supervision lies with the Executive Branch, but this process was cut short. A Senator’s letter, amplified by social media, undermined public trust in Silvergate, ultimately leading to a crisis of confidence. It is important to uphold the principle of due process. Silvergate was denied due process.”
Ahluwalia said he looked forward to sharing his perspective with the House Financial Services Sub-Committee on Digital Assets.
There's no politician without an 'agenda'
— Priyanshu Kalra (@PriyanshuKalra) March 9, 2023
Ahluwalia noted that:
“many banks are underwater on the securities portfolio. Including the Federal Reserve. The bank run forced the crystallization of losses. Other banks can hold to maturity.”
And:
“The fractional reserve banking model relies on public confidence. If banks are defamed and that confidence is destroyed, the bank goes down.”
Ahluwalia called his statements the “tip of the iceberg,” with more to come.