Silicon Valley Bank and Silvergate Bank have been important to many in the cryptocurrency industry, and the theory is growing that regulators helped them downfall.
Global economic conditions are tightening. Interest rates are fluid. And inflation has not yet been contained. Given the economic headwinds, the fact that Silvergate Bank, Silicon Valley Bank, and others are failing isn’t surprising.
But why now? Rapidly rising interest rates are highly disruptive to the banking model, but these particular bank failures are frowned upon. It just so happens that these banks are important to the cryptocurrency industry.
Selective execution according to agenda
Government agencies often selectively enforce complex or unclear rules and regulations to pursue agendas. They can defend their actions by saying that the public interest is at stake.
Here’s an analogy: An apartment building needs to be demolished for an upcoming highway expansion project. An option is to execute eminent domain, a scenario in which the government dismisses all leases and titles and has the ability to control the property. This is not a popular decision in the community. There is another option. The local government was unable to enforce existing regulations on maintenance and upkeep, resulting in the property falling into disrepair.
When I warned about the chokepoint a month ago, I had no idea that in a million years it would go 100x and actually beat the top 3 banks facing cryptocurrencies. It’s breathtaking. And this was no accident.was dismantled https://t.co/HacUQfUWWF
— Nick Carter (@nic__carter) March 13, 2023
A government inspector appears. The property needs a major update. If you don’t, you’ll have to condemn. Property owners cannot afford to code their properties. And residents have to move and relocate for their own safety.
This is how governments do it.
Governments set a wide range of rules and regulations and enforce them selectively, creating the conditions for the desired results. They avoid direct accountability and public outrage, but accomplish the necessary actions.
The market situation is setup
When market conditions start to tighten, discretionary and speculative businesses, such as startups, restaurants and hedge funds, will be the first to hit. Therefore, the tech and crypto sector banks will be the first to undermine. Most banks focus on serving a specific industry. Banks are in a precarious position when their customers are failing.
i think i will be the first @ewarren Critics do the right thing and publicly thank her for her role in Acceleration #bitcoin When the history books are written, Operation Chokepoint and Warren’s bank run may prove to be the “proverbial straw” that broke fiat’s back.
— John E Deaton (@JohnEDeaton1) March 17, 2023
If the bank is publicly traded, the consequences are devastating once the public understands the plight. SVB tried to bail out by raising additional capital through the open market, but the market got wind of it and fell short. Depositors fled to “safer” banks. A typical bank run ensued. In effect, the market prepared banks for regulatory intervention.
Regulators make the most of
The failures of Silvergate and SVB and the takeover of Signature mark the beginning of regulatory efforts to aggressively weed out crypto banks. If cryptocurrencies could be surgically decoupled from traditional banking, it would solve many problems recognized by regulators. Without the public perception that investment opportunities are being deprived, the category could be aggressively regulated once crypto entry is removed.
Good news: we’re not all conspiracy theorists
Bad news: ‘Chokepoint 2.0’ seems legal https://t.co/cQ8ykByInb
— Lizzy Fallon (@FallonLizzy) March 16, 2023
However, this is not a conspiratorial plan. Rather, regulators are using weak balance sheets and poor banking practices to set scenarios in which they think they should intervene. There were no bank runs at Signature. Regulators took advantage of the chaotic situation to pursue their agenda.
Startups, especially cryptocurrency startups, are inherently speculative. Due to the lack of regulation, large-scale blockchain is “unknown” speculation. Remember the analogy above. A lack of oversight and regulatory direction is pushing the boundaries for financial institutions serving technology and cryptocurrency companies.
Due to macro market conditions, this kind of experiment created a situation that pushed these banks to the edge of their solvency. When regulators step in to “save the day,” you get a 2-for-1 deal. They are perceived to be of general public interest in mind as they eliminate features that are critical to the crypto industry.
contagion is a meme
No bank can withstand bank runs. Fractional banking has resulted in a system in which banks do not have enough assets to completely cover their customers’ deposits. When investors start questioning a bank’s stability and withdraw their deposits, the bank either fails or needs to be bailed out. Contagion, like any meme, is a meme built on deep, potentially uncomfortable truths. Banks are not as stable as the public believes.
Related: Why doesn’t the Federal Reserve require banks to hold depositors’ cash?
Nick Carter calls this recent regulatory focus on crypto banks “Operation Chokepoints.” However, regulation has accelerated bank failures and destabilized the financial system as a whole. We see this in bank runs at financial institutions like First Republic, a traditional midsize bank. More runs are coming.
Market forces have opened the door for regulators to actively weed out crypto banks through controlled demolition. However, the demolition has drawn investors’ attention to serious existing systemic risks. Controlled demolition may serve the immediate agenda, but contagion is on the brink.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.