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Welcome to Crypto Long & Short!

Programming note: This newsletter will be taking a break next weekend and will be back in your inbox Wednesday, Jan. 25.

I know what you’re thinking: “Wait a second, Wednesday isn’t Sunday …” Spot on, soldier; this newsletter is moving to a Wednesday distribution. On top of that, Crypto Long & Short (CL&S) will have a new author.

Yes, this is my last CL&S column. CoinDesk crypto markets analyst Glenn Williams Jr. will be taking up the torch.

I picked this newsletter up on Feb. 20, nearly a year ago, and you’ve bravely stuck with me for 45 issues of CL&S. For those who read my words, I am grateful; for those who didn’t, your loss.

Fear not, I’m not going far. I’ll be writing a column every Monday for The Node, CoinDesk’s daily newsletter summarizing and analyzing the most pivotal developments, trends and ideas in crypto. Subscribe here if you can’t bear the thought of me not clogging up your inbox anymore. (You should subscribe anyway for the handy news digests and the other regular columnists, David Z. Morris and Daniel Kuhn.)

As for my CL&S swan song, let’s talk a bit about Silvergate Bank.

– George Kaloudis

Silvergate Bank (SI) started in San Diego in 1988 as a savings and loan association (S&L) when that was all the rage. It’s a bank now – for … uh … reasons – that markets itself as a “leading provider of innovative financial infrastructure solutions and services for the growing digital currency industry.”

Basically, Silvergate is the bank for a lot of crypto businesses (1,300+, according to the company website, if you include “fintechs”), which tend to have problems maintaining banking relationships. As such, it’s probably not surprising to learn that Silvergate’s assets under management (AUM) has grown quickly the last few years. Its stock price did, too, by more than 1,500% between November 2019 and November 2021.

But once FTX collapsed, Silvergate customers fled (withdrawing $8.1 billion in the fourth quarter, aka roughly 70% of total deposits) and U.S. Senator Elizabeth Warren (D-Mass.) sent it a scathing letter. The stock price tanked, down more than 40% in the past month.

Now I’m not here to spread fear that Silvergate is insolvent. After all, Silvergate satisfied the customer withdrawals and has started leaning into cost cuts by way of laying off 40% of its staff and abandoning expensive ideas like the Diem project it bought from Meta Platforms (META) early last year.

What is worth highlighting here, though, is how Silvergate satisfied those customer withdrawals.

In November, I wrote that the crypto credit contagion was “unlikely to spread to other markets,” but Silvergate just proved me wrong. To satisfy the spike in withdrawals, Silvergate received billions of dollars in advances from the Federal Home Loan Bank (FHLB) of San Francisco, ending 2022 with $4.3 billion of FHLB money on its balance sheet. For context, Silvergate held just $700 million of these advances at the end of September 2022.

To be honest, I wasn’t (and am still not really) intimately familiar with the FHLB when I first read about this – but if the name of the organization wasn’t a dead giveaway that this was strange, then its mission statement stating that the FHLB provides “members with a reliable source of funding for housing finance” should.

(As everyone says, you can’t live on the blockchain.)

The FHLBank System was created under President Herbert Hoover through the Federal Home Loan Bank Act in 1932 with one big goal: lower the cost of home ownership. It empowered FHLB banks to provide liquidity to its smaller member banks, of which Silvergate is one. So, yes, part of the crypto industry was effectively bailed out by a government-sponsored institution whose stated goal is to curtail housing costs.

Of course, this isn’t illegal – else you’d be hearing about it from literally everyone but me. The FHLB is also tasked with providing “liquidity for members’ short-term needs” – and the 70% withdrawal I mentioned above sure seems like a time when liquidity might be needed! Plus, FHLB supports members who support housing finance and community investment (whatever that means).

Enough ambiguity to not be illegal.

But just because it’s not illegal doesn’t mean that we should be happy with it. Sure, I’m glad Silvergate didn’t go under, but isn’t this just another bailout? Crypto supporters would be hard-pressed to convince investors that crypto is legitimate if there’s a government program propping up part of it.

Does crypto need propping up because, well, if so, maybe it shouldn’t be up in the first place?

Seriously, if someone, like a bank, doesn’t want to bear the downside risk of investing in crypto then maybe an entire depositor cohort and loan book shouldn’t be made up almost exclusively of crypto companies. Perhaps banking institutions should do risk management through either stricter collateralization rules or broad diversification across many other industries.

Not to mention, FHLB advances work such that in the event of a bank failure, it is senior even to the Federal Depository Insurance Corporation’s (FDIC) claims. Why is that important? As John Heltman wrote in American Banker, hypothetically “if regulators were to shut down Silvergate or a similar bank that facilitates crypto and owes a Home Loan bank money, the failure could prove more costly to the [FDIC’s] Deposit Insurance Fund.” Such a scenario wouldn’t be catastrophic for the agency whose stickers appear on the door of every bank in America, but it would underscore that crypto is no longer just an island.

So, yeah, crypto contagion did in fact seep a bit into the “real” economy, contrary to what the Federal Reserve suggested in its Dec. 13-14 minutes of the Federal Open Market Committee (FOMC). Sure, it’s still small potatoes: Bank deposits in the U.S. number in the tens of trillions of dollars, dwarfing Silvergate. But we should expect more from the banking institutions that service crypto companies. If crypto was born to be separate from the legacy institutions, then it shouldn’t depend on those institutions in times of need.

Cboe Digital is a U.S. regulated exchange and clearinghouse bringing trust and transparency to the crypto spot and derivatives markets. Cboe Digital honors a separation of duties and includes intermediaries as a key tenet in managing risk and avoiding conflicts of interest. Our unified spot and derivatives markets are underpinned by responsible innovation and enable collateral efficiency. www.cboedigital.com.

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Podcasts Worth Listening To

The What Bitcoin Did Podcast

Bitcoin: A Year in Review with Matt Odell

Matt Odell is host of the Citadel Dispatch, co-host of Rabbit Hole Recap, venture partner at Ten31 and co-founder of Bitcoin Park. In this interview, we review 2022: the attacks on privacy, the reaffirmation of self-custody, how people who were treated like gods rekted the market, and the responsibility of Bitcoin podcasters in doing right by the audience.

Crypto Crooks

BitConnect Episode 1: The Gujarati Connection

In this first episode of “Crypto Crooks,” we go back to the beginning with Amitoj Singh, a CoinDesk regulatory reporter based in India, to look at the rise of BitConnect. We also tackle some of the crimes surrounding the company, including a vicious kidnapping, and the suspicions regulators quickly brought to BitConnect’s door. It was a glorious beginning … already ripe for a tragic end.

The Breakdown, WIth NLW

DCG Responds as Gemini Accuses Company of Fraud

Crypto 2023 – like Crypto 2022, but angrier. This week, Gemini co-CEO Cameron Winklevoss accused Genesis, DCG and DCG CEO Barry Silbert of fraud in a major escalation of their fight over frozen funds. Silbert and DCG, CoinDesk’s parent, responded with their own letter and Q&A arguing that Genesis and DCG are fundamentally different entities. NLW covers the war of words and the community’s response to it.

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