Welcome back everyone. I am Caspian Sea.
I'm joined as usual by my partner in crime.
Mr. Bennett Tomlin, how are you today?
Okay, I guess it's another day in crypto where everything's
falling to pieces. It just keeps coming.
There's it doesn't stop.
I'm asleep. We're going to ignore all the
noise that's been going on today.
We're recording on Thursday, January 12th.
We're going to focus ourselves on something that we have been
really getting into which is Silver Gate.
All these Banks, signature Silver Gate, Metropolitan
they're all struggling. These are cryptocurrency.
Related banks. These guys have really been
involved with the cryptocurrency industry in general, that's a
lot of their customers. We previously have discussed
how, like, signature was selling all of their customer deposits,
their cryptocurrency customer deposits, which is not something
you generally see Banks. Do, why don't you kick us off
Bennett? I'd love to hear your takes on,
on some of the stuff. Sure, I think one of the most
interesting things to start with is like how Silver Gate and
signature kind of function. They each had their own kind of
version of this Silver Gate had one called Silver Gate exchange
Network and signature had one called Signet.
And what this was, was a way for exchanges to effectively, by
banking at Silver Gate, or signature, be able to send funds
to any other exchange quickly, rather, than waiting for the
normal process. It could be done effectively
instantaneously between any of these exchanges.
And so as more and more exchanges in crypto companies
signed up for the for these networks, you start to see a
little bit of this network effect.
Kind of like we saw at the beginning of Tether where each
new one that integrated made, it more appealing for others to
integrate, because you could take advantage of the existing
Network. And so because of these networks
or at least driven in part by these networks, we saw both of
these Banks so Brigade in signature build up billions of
dollars in deposits and now both of them have lost billions of
dollars in deposits 8.1 billion dollars was withdrawn from
Silver Gate posts FTX signature ended up selling 8 to 10 billion
dollars in customer deposits, both of them have needed to Look
to Alternative sources of funding in order to sustain
themselves will get into that more in a minute, I think.
And the other thing that I think is interesting is Silver Gate.
It turned out was banking FTX through an Alameda research,
entity called North Dimension Incorporated, and signature is
banking Finance or was banking Finance at lease through an
entity called key Vision development, limited and so
structurally. There's so many similarities
between these two Banks from Um, the Network's, they were using
from the amount of deposits, they've lost over the last
couple of months to the performance of their stock
prices to like everything else they've had to do.
They think, looking at these two right now in this moment, you
are really seeing how this exposure to the crypto.
Ecosystem has hurt these Banks. It's really funny because we've
previously, I think a lot of people just kind of presumed
that there was no exposure to the real world financial
ecosystem, which was a mistake. I mean, I've been talking about
how this could sneak. Way into the real world
repeatedly for a while now. And even you I think of often
disagreed with me and thought like no, there's no way like
it's cut off. I've been saying this for a
while that this is absolutely. Now a part of the traditional
Financial system and if you want to have an idea of exactly how
signature is the perfect example now, because what we had was
essentially a bank run, we had a real life Bank Run on a
real-life bank if we look at their ticker.
So, today of the day, Day of recording.
They are up 13 percent from their previous from the previous
day, they're trading at 1375 that sounds great.
Let's keep in mind, however that they traded at one time for
almost two hundred and twenty dollars a share.
So that is a massive fall from grace, for sure.
But it's not just about their stock price going down.
It's not just about this Bank Run.
It's about how they tried to cover up their Bank Run, which I
never heard of this. Most people I know had not heard
of this, it's a really interesting and strange
governmental agency. It's called the federal home
loan Banks system. It's 11 government-sponsored
banks that quote provide liquidity to the members of
financial institutions to support Housing Finance and
Community investment. I am stuck on those two points
by the way. Like, since I found out that the
federal home loan Banks gave Silver Gate for point.
Three billion dollars. They're called advances their
loans that people like you. And I cannot get because they're
at better rates than you and I could ever get even if we had
perfect credit they're going on International markets and
getting the best rates they can possibly get.
But these guys they went to, there's eleven Banks, one of
them is in San Francisco. Silver Gate.
Went over to the fhl bank of San Francisco and said, please, we
need a 4.3 billion dollar advance because essentially
looks like we're getting a bank run here and I thought fhlbank
of San Francisco gave them. This 4.3 billion dollar advance
when I looked at the 10K because all of these banks are actually
registered with the Securities and Exchange Commission.
The whole concept is kind of weird when I I let me backtrack
here get into the last of these Banks throughout the yeah
there's 11 of these Banks throughout throughout the
country. They work as a cooperative and
they were established in the wake of the Great Depression to
kind of ensure that people were able to, To still get loans to
get a home to build a, you know, a city hall to whatever it is.
It may be for their Community. The designation of these Banks
was supposed to be okay, we're going to help them do that.
Now, at some point, things definitely got out of control
because By Night by the 1980s when we were in the midst of
what was called, The Savings and Loan Savings and Loans crisis,
the S&L crisis, it was clear that the FAA fhlbanks had
Experienced some sort of regulatory capture because they
were torn apart. There was a bank board, that was
ended. They stopped the bank board.
There was no more Bank board after this.
And instead two different entities, took over one being
the office of thrift supervision and the other being the federal
Housing Finance board. Ultimately, we had another issue
with regulatory capture because those, the office of thrift
supervision was merged and the FH, FAA the federal Housing
Finance Agency took over in regulating these Banks, it seems
like now that definitely didn't work because well, maybe and
maybe you want to talk about this, somebody who is a chair.
I don't know if it's for the San Francisco Branch or if it's for
the entire Cooperative Banks here, but somebody was involved
with FTX us and works for these Banks.
Now who knows whether that means they recuse themselves.
Cough. If they weren't a part of this
loan process. I mean, I hope so but it's a
weird coincidence, I guess. Yeah, I remember seeing that
yesterday and certainly finding it unusual, that it was one of
the board members for FTX us was also like a board member at one
of these Banks. A vice chairman of one of these
Banks. So he was he was a chairman of
the board at FTX us and a vice chair.
For either San Francisco or just the whole thing.
And either way that just is a, it's just a really bad look.
That one of the main banks for FTX would instantly go to this
thing that nobody has really heard of or understands much
about to receive a 4.3. Let's call it alone because
that's what it is. It's not an advanced.
They got a 4.3 billion dollar loan from this governmental
agency that hardly any of us are aware of and definitely not for
home like home purposes, not for community building.
So I'm confused. What is the purpose here?
So wait. I mean, I'm glad it's dumped you
to be quite on but I'm glad it's dumped you because it doesn't
make any sense and like, yes, several parts of this mechanism
are weird. Like when I was doing not super
extensive research in this, but when you first sent it to me and
I started reading it, several parts were weird.
Like how you have to buy stock in the Co-operative in order to
like, gain access to the credit. Like if I saw that mechanism in
an algorithmic stable Quinn, I would go.
Oh, that looks fragile. That looks like the part of this
thing that's going to break. My understanding was the way
they contribute to Home sin things like that was because
they are effectively creating, or they're buying up a whole
bunch, buying originating, whatever bunch of mortgages and
using those to create a line of cash flow.
And then in exchange for a claim against the assets of these
member banks are then able to extend Advance the expected
income from the mortgages, right?
Isn't that like ditional e traditionally but it's not like
Silver Gate is doing Al A bunch of Home Loans.
It's not like Silver Gate is contributing to De La Hoya area
significantly. You know what I mean?
Yes. And there was a post on American
Banker that I think kind of still explains the way.
They would justify this to themselves where they're talking
about how this Cooperative of these Banks.
Effectively when they extend these advances get a lien
against the assets of the bank itself that is higher in
priority than like even the FDIC.
And so if any of these banks are unable to pay back their loans
through To effectively step in and strip all these asses out of
the bank before the FDIC comes in and then has to fill up the
rest. And so, there are people who
have argued that the existence of this Cooperative has
effectively created. This moral hazard where this
group of banks is incentivized to extend more of these loans
because they have this such. They have such this Premiere
position in the stack. If something goes wrong with the
bank, from what I noticed, from what I saw, I only looked at San
Francisco but from what I saw the Amount of billions of
dollars that they're extending to Banks.
It's actually for San Francisco. Let's say, I think it was
something in the enduring 2020 of, right?
So the only two years that I saw were 2020 and 2021.
They don't have 2022 out yet. But 2020 had a significant
uptick in advances that they gave out, but I think that was
something still in the, in the realm of, I don't know, 25
billion, something like that and then it came down in 2021 to
like 16. Alien and I suspect that it's
going to go back up for 2022 because we have a down market
and all that. But either way, let's say it
jumps back up to 25 billion or 35 billion.
No matter what right? Let's say it's this something in
that range, a 4.3 billion dollar loan.
To one entity is like a significant chunk of those
advances and the way it works by the way.
So there's these 11 banks that work together.
This loan is extended via the bank of San Francisco.
The federal Home Loan Bank of San Francisco.
And there they are, the main bank responsible for this
Advanced, but ultimately, it's all 11 banks that have to deal
with this. So if they can't recoup their
losses, ultimately, all 11 of these Cooperative banks have to
put that bill. Now, like you said, they say
that has never ever had to happen.
They've never had to deal with this.
They haven't lost money, hard to believe, but okay, and I don't
know, like, I find Whole network to be easily captured regulatory
Ali and to be very opaque, despite the fact that we have
these these SEC filings and these other, these other things,
like the idea that I just need to buy some stock as a bank or a
credit union to get extended in advance.
I its, it feels strange, it feels almost sounds like me.
Laundering, it almost sounds like I'm talking to scribing
money laundering like I'm, I'm like confused how that could be
so simple but that's fine. Whatever.
Okay, great. What do we think?
Happens? Next I think is the question for
Silver Gate, right? So they've been they've been
extended this massive loan from the federal Home Loan Bank of
San Francisco. Generally you have a year or two
to pay these things off. I think it's not something that
they need to worry about instantly but it's not going to
last forever either. What do we think is going to
happen next? What's the what's are they
saved? I think this might have saved
them, I'm not sure. Well, I mean, maybe right.
Like hopefully we've set up our bank regulations in such a way,
that even, this type of level of deposits being pulled out and
assets being seized because silver, get assets, have now
been seized as part of the FTX bankruptcy.
The bank will still be able to tap liquidity in survive.
The thing that's like the point of a lot of the stress testing
in the building, for resiliency, in the fear would be that the
continued limitations and And silver Gates diminished ability
to interact in a meaningful way with billions of dollars of
crypto deposits, makes them a less effective business where
eventually they are unable to drive enough profits, or
whatever, to sustain them. One of the things that still
interesting to me, and I kind of hinted at this earlier, when I
was talking about how ft x is banking through Silver Gate, was
done through an Alameda, research, entity called North
Dimension Incorporated, that's strange.
That feels like something that should not have happened and so
I am curious, if Silver Gate is going to end up getting pulled
into any of the legal proceeding surrounding ft x because of
that, I do want to propose that there's This is not, this might
be a symptom of the financial system that we live in is as
well. Where I think a lot of people
would tell you. It's pretty normal for
conglomerates, massive businesses, these these things
to have, 100, subsidiaries a different subsidiaries and doing
different things and if they need to get loans via those
subsidiaries as opposed to the main company, that's nothing
particularly weird. But again I think that is a
symptom of the world that we live in.
That's not to say that I think it's acceptable I think it's Not
acceptable. I also think that they're right
when they say this happens with a lot of businesses.
So I think you're probably right that there's a lot of businesses
that use a lot of subsidiaries in a lot of jurisdictions for a
lot of different reasons. I think the difference in this
case is that they were moving money and there's a lot of extra
regulations on like what you need to be doing if you're
moving money, right? And so like the fact that they
saw presumably deposits and withdrawals that look like an
exchange going to what was supposed to be.
Well either in electronics, importer exporter or an
over-the-counter trading desk What you think, North Dimension
Incorporated was that Silver Gate thought those flows?
With the same is strange. And like the fact that they were
in a sense, facilitating, whatever Behavior.
Ella M ft x was engaged in there really interesting point that
you're making, because I spoke to Francis Coppola today who we
previously had on the on the show, she talked to us about
banking. So she is generally a good
person to reach out to about this stuff and she directed me
to a bank called a He bank, which I don't know if you're
familiar with Bennett, but but if you are, I'm going to just
explain this regardless so that every cuz I was not aware of
them until today, so she she describes something called a
blv, which was a bank in Latvia that was established in 1993
essentially right after the fall of the Soviet Union and was
pretty much designed only to avoid sanctions for Russian
Nationals and was continually doing it continually ignored.
Whirring sanction directions from the US Treasury
continually. Just disregarding everything us
Regulators. Were trying to tell them to do,
right? And they this cost them
everything. So what ended up happening in
2018 the treasury said, okay we're not fucking around
anymore, enough of this bullshit, you get no US Dollars,
you get none, no more US dollars.
Go into or out of your bank and we're going to find anyone who
does. We're going to crucify you if
you give a b, a b LV, any money, And guess what happened?
They went out of business. It was that easy?
And so, and I think a, some correspondent Banks got in
trouble for helping them do this, which is what we're going
to be seeing. I suspect with Silver Gate, and
signature, and Metropolitan, and evolve, and dud, at edited, like
we could name, 500 of these stupid banks that have now
gotten involved in cryptocurrency, but I do think
we're not going to see prison time.
We're going to see any of that stuff.
Some of them are going to go out of business and Of them are
going to get fine to good. God hell so they know never ever
to do this again and crypto currency becomes Untouchable
Untouchable for a lot of these Banks, not every bank, but a lot
of banks on that note I think Metropolitan is in a little bit
of a different category than Silver Gate and signature
because they've been reducing their crypto business and just
finally announced that they had ditched their last say several
hundred million in deposits as an exact number.
I don't have it written down but it was less than a billion.
I'm pretty sure that they had left over this last quarter.
And that they were done with the business and the precipitating
event or one of the precipitating motivations I
think for this. Might be that on January, 3rd
the office of the Comptroller of currency, the Federal Reserve,
and the FDIC issued, a joint statement, reiterating to Banks
the things they need to be aware of if they're going to be
engaging with the crypto space. And I think the list of things
that are highlighted in this statement really kind of give
you a little bit of insight into how these Regulators are
interpreting crypto right now. They warned of like the obvious
things. Like there's a risk of Fraud and
scams that Legal uncertainties related to custody and
ownership. But they also say and when these
companies that some of these crypto companies who are using
them are making inaccurate, public statements about FDIC
insurance and that the banks were serving them need to be
aware of that. They also reiterate that like
any banks that are holding assets for stable coins, need to
be aware that stable coins as a structure may be vulnerable to a
run which can lead to a huge outflow in Assets from the bank,
that's holding the stable coins assets.
They also then like, reiterate that there is a large contagion
risk in the ecosystem because of how interrelated these entities
are and how much is shared between these different
cryptocurrency companies. And one of the things that I
really want to bring attention to that, they say is that they
basically tell them that engaging with crypto currencies
that are on public. Blockchains is not going to be
Propriate they say issuing or holding as principal crypto
assets that are issued stored or transferred on an open public
and or decentralized network is highly likely to be inconsistent
with safe. And sound banking practices,
they are telling these Banks. They should not be holding
cryptocurrencies and that and like, they are really
emphasizing that. And then they go on to
specifically, say the agencies have Second safety and soundness
concerns with banking models that are concentrated in crypto
asset, related activities that Silver Gate in signature.
They are like drawing a moon down and evolve.
Yes. But I do like drawing a circle
around the activity of these so-called cryptocurrency Banks
and saying, we don't think that's what you're supposed to
be doing. And like the knock-on effect of
this is that we're going back to, like, how hard it was for
cryptocurrency companies to find banking in 2017.
And I expect, we're going to see them all.
Back to their same Shenanigans. Meaning my don't know if we must
did we mention? I suspect we mentioned this
already last time where it's like oh wow you think.
This is knew that these banks are freaking out and running
away from all of these cryptocurrency companies.
No, no like 2017, that's how bit for next got screwed, that's how
tether got screwed. That's how all these companies
started essentially, having nowhere to go and there's a
chicken and egg game here that that cryptocurrency Tickets and
critics and Skeptics like us play where it's like on one
hand. They say, well, the reason they
do these Shenanigans with all this money is because they can't
get Banking. And then we on the other hand
are saying, well, if they didn't do all these Shenanigans, maybe
they could get banking. So it's it's a bit of a
cat-and-mouse chicken and egg. Who knows?
What's the right answer here? But we have seen this before and
I do want to, while you were talking, it reminded me that we
had seen in August of 20:22 now, six months ago, just crazy
crazy. How time flies that Bret
Harrison, who was the president of FTX us had written this
tweet, saying we are FDIC insured and the FDIC almost
instantly came down on him and said, you are not FDIC insured.
You delete that tweet right now, you make sure that everyone
understands that you are not FDIC insured and and make sure
that we have nothing to do with you anymore.
I don't mention us and he had to come out and apologize and they
cleared that up. But like the FDIC has never
fucked around with this stuff. The FDIC is very they were that
one of the first Regulators that I was very proud of what they
were doing to try to the way people discuss, wanting the SEC
to regulate versus litigate that is what the f FDIC did.
They were like stop doing that right now and if you Keep doing
it. You're going to get in big
fucking trouble. Stop.
And lo and behold, here we are a lot of these guys didn't stop.
And here we go. Now you're in trouble and it's
not just with the FDIC and so with everybody.
So I am glad on one hand. I'm glad we're seeing this now
on another hand, I'm sorry that this is happening and it's
unfortunate that it has had to come to this I guess is what I
is, what I would say. Yeah absolutely.
It is one of the last things I want to kind of put a note on in
that like list of risks was the susceptibility of stable coins
to run signature which we've been talking about a bunch.
In this episode was her at one point, had a whole bunch of
circles deposits there for u.s. DC and so that again feels like
them saying hey we're aware of what you're doing.
Here's our statement, do you want to self correct?
Or do you want the other option signature, which was trading at
roughly? Hundred.
And let's see what that is. $370 ish for its all time.
High is now trading at $117. So also doing significantly, bad
seriously. Having some issues we don't know
what this means. I want to make sure everyone
understands that we are not lawyers.
We are not hell. We're not doctors were not.
We're not saying we're not saying we're nobody were
commentators and we don't want anybody to take what we're
saying to mean, that they should be worried about having money on
A of these platforms that is not at all.
What we're saying, I'm not trying to imply that at all.
I'm not trying to suggest be scared, get your money out.
Like, no, I just think that these are concerns to look out
for think, about consider and as an industry, this is something
that is we need to be thinking about and be concerned about.
And if you're over the FDIC insured limit, it can always be
valuable to consider diversifying the places you're
storing your cash. Hopefully, most people already
know But yes, I think that's a good point to make.
And I think that's a good point for us to actually end on for
this episode, quick episode about banking, which is
definitely not involved with cryptocurrency at all.
It's totally different ecosystem.
So, yeah. Thanks everybody hit the like
And subscribe button if you want to finally see cast, coined a
bow. We're going to try to buy a u.s.
federally Chartered Bank. Baby, let's do this guy's we're
gonna we're going to buy Bank. We're going to get banking,
forecast, coin, and then we're going to then we're going to
Leave the United States of America and get rated but that's
for another time anyway. Yep.
Take care everybody. Thank you.
Leave the United States of America and get rated but that's
for another time anyway. Yep.
Take care everybody. Thank you.