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Off Chain 3/16/23: The Future of Crypto Banking
346 Plays1 year ago
In this week's episode, we do a deep dive into the future of banking in the crypto space. We discuss:
- First Silvergate collapses, then SVB, and now Signature Bank.
- A primer on why SVB failed.
- What this could mean for the future of banking in the crypto space and what we really need from it.
- What will the Fed do on March 22 at the next rate review announcement?
Recommended![CBDCs: The [Dark] Future of Money (Part 2 of 2) image](https://media.zencastr.com/cdn-cgi/image/width=112,quality=85/image-files/61fc0461fb20e00040aeb09e/5b9f1396-2a8e-418d-82a0-30fd00969266.jpg)
Transcript
Introduction to The Decrypting Crypto Podcast
00:00:13
Speaker
Hello, and welcome to the Decrypting Crypto Podcast. It's March 16th, and this is Off Chain, your weekly recap of the biggest stories in Web3. I'm Matthew Housebarbie, and as always, I'm here with Austin Knight. How you doing, Austin?
00:00:27
Speaker
Uh, conflicted? Maybe? I don't know. I'm looking at the chart right now that is green for the first time in a couple of weeks, which is, uh, Bitcoin's current value hanging out around like 25 K right now. And I think it's probably poised. Yeah, it is nice to see that. I think it's probably poised to go up because Jim Cramer just said that he's selling all of his Bitcoins. So that's a good sign. Oh, that's bullish.
00:00:56
Speaker
On the other hand, the banks that back our industry have all kind of just evaporated, Matt. That's good, Austin, because it means no one can sell. No sell pressure. There's no banks to sell through. We're good.
SVB Collapse and Its Impact on Crypto
00:01:18
Speaker
I'm sure everyone's been enjoying the relentless coverage of Silicon Valley Bank.
00:01:25
Speaker
Don't worry, we are going to do a deep dive into that very same topic today, but we're going to be talking a little bit around like, you know, very high level. How did the SVP collapse happen? And then also Silvergate, Signature Bank, et cetera.
00:01:40
Speaker
And talk a little bit more about what the future holds for crypto banking in particular. I will also say one thing we're not going to cover in this, but something I am pretty happy about is Arbitrum have finally just announced that the much anticipated like the multi year question of when is now been answered in their airdrop, which is coming next week, which is going to be
00:02:04
Speaker
Pretty great. So I'm excited about that. Outside of that, you know, the whole markets are up in the most bizarre of terms, but we can understand and explain and unpack why. So why don't we dive into this thing? You ready, Austin? Yep, let's do it.
00:02:29
Speaker
So we talked last week about Silvergate Bank collapsing, and we mentioned at the time, I think, well, I think we said, well, thank goodness that it was Silvergate that has around 11 billion in assets and it's not Signature Bank with a
00:02:46
Speaker
111,114 billion in assets somewhere in that region. Yeah, no, signature banks as well. We did this. And the big kind of catalyst behind all of this is, of course, Silicon Valley Bank. So why don't we kind of start there and talk a little bit about why
00:03:11
Speaker
Silicon Valley Bank failed at a very high level and then we'll start digging into what this means and what the future holds and all of the collateral damage and I guess panic that's hitting the markets.
The Rise and Fall of Silicon Valley Bank
00:03:25
Speaker
So Silicon Valley Bank may have been the biggest bank you'd never heard of if you were not in business banking
00:03:33
Speaker
It focused largely on the tech sector, had a huge amount of their exposure to the large drawdowns that this space saw pretty much through the past 12-18 months. But at the same time, they also benefited from the huge upside in 2021 from startups getting funding and then depositing into Silicon Valley Bank.
00:03:57
Speaker
It's worth calling out, Silicon Valley Bank was the go-to. It's a commercial bank. It wasn't focused on end consumers, and it's an important call-out. But pretty much any startup tech company that raised capital in 2021, the VCs that were funding those recommended to those companies that they should bank with Silicon Valley Bank.
00:04:25
Speaker
But before we go into this, it's just a quick refresher of actually how banks work at the high level. And banks work by growing capital primarily through deposits. So the bank's customers, in this case, companies, actually depositing funds into the bank. And then they lend out those deposits to create additional profits.
00:04:53
Speaker
Now, Silicon Valley Bank had an obscene level of growth in 2021. It was like monumental levels of growth. And this was largely fueled by the VC feeding frenzy that happened in tech, and actually got to a point where, you know, they were taking all these deposits in, they were lending out, they actually had more cash than they could even lend out. So they decided instead of holding all of this capital and cash,
00:05:20
Speaker
they decided to put a huge chunk of their capital into bonds, US Treasuries. Now, what you would probably say is the safest, one of the, if not the safest asset class in the world. Nothing wrong with that. Pretty common practice to put, instead of holding cash, put them in Treasuries. The problem was they actually tied up a huge proportion of their capital
00:05:49
Speaker
at a time where interest rates were at kind of all-time lows. They were yielding very, very little on what was billions of dollars of cash. It was like in the grand scheme of things, a nominal amount, but they were long dated Treasury bills and government-backed mortgage securities.
00:06:08
Speaker
And the bet here that they made in 2021 was, and remember, this is the time when we were all talking about, is inflation transitory? Or is this actually a real thing? I guess it wasn't transitory, a spoiler. But they were betting that interest rates would remain low for a very long time. And they were, of course, wrong. Rates have increased dramatically.
00:06:34
Speaker
and they've had to sell out a load of their bonds at a huge discount. So they lost about $1.8 billion in the process. So for example, if you're putting a billion dollars in a, let's say a 30 year treasury bill, you're locking in the interest rate. It's a fixed interest rate on a treasury bill. So let's say at the time it was
00:06:58
Speaker
I don't know, what was it probably like 0.2% interest, something like that, ridiculous on the yields, right? And you then hold that and if you keep it until maturity, okay, those Treasury bills, you'll get that billion plus 0.02% interest.
00:07:16
Speaker
You can also sell them on the open market, but if interest rates now and yields on treasury bills at the time of this were like 4.7% or 4.8%
00:07:29
Speaker
your bond is going to kind of go sell a discount because I could just purchase a fresh treasury bill, get my 4.7% interest on that nice juicy billion I want to spend versus buy yours. Or what will happen is your kind of your bond will be sold at a discounted rate. And this is the problem they had, they needed to shore up some
00:07:53
Speaker
liquidity because a lot of their customer base had had huge drawdowns in their valuations, deposits were reducing, so they had to cover up. They lost $1.8 billion.
00:08:08
Speaker
That's a somewhat sizable hole, but in the grand scheme of thing isn't enormous, right? Like when we put into the context of them having like well over, well over like a hundred, sorry, well over $200 billion in assets.
00:08:26
Speaker
not quite $250 billion in assets, which is an important disclaimer to make, but a lot. So they announced that they'd be raising some capital that would cover these losses and shore up some of their capital reserves.
00:08:43
Speaker
Unfortunately for them, this spooked the hell out of the market and in particular, the kind of wider VC community. And what happened was it triggered a run on the bank. So the most kind of famous of all of this so far is Peter Thiel saying, what is it? Is it Founders Fund? Yeah.
00:09:10
Speaker
saying to all of the startups that funded through Founders Fund, hey, like something's going on at Silicon Valley Bank, we recommend you pull capital out of it because we think something could go really, really bad. And, you know, this combined with just then just a real sense of panic in the startup community triggered a bank run where $42 billion
00:09:35
Speaker
was withdrawn last Thursday alone. And by Friday, the bank had a negative cash balance just shy of $1 billion. That's not good. That is never good. As a bank, what I would probably say us is you don't want to have a negative cash balance because then you have minus money. Not good.
00:09:59
Speaker
Uh, I do think Matt, you know, as bizarre as this is, this isn't the first billion dollar hole we've seen in the last 12 months. It's not, it's not. And you know, it's a hole that can't even be plugged with a super yacht. Unfortunately.
00:10:14
Speaker
So, you know, well, what happened here, right? So you've got minus $1 billion, not great, for the bank. And the FDIC, the, oh my goodness, Federal Deposits Insurance Commission, I think that's the acronym, they jumped into
00:10:36
Speaker
effectively close the bank on the Friday, which is often the case when the FDIC will close a bank so that they can find a buyer after the market's closed over a weekend.
00:10:49
Speaker
But the big kind of thing with all of this that was announced on Sunday is that the Fed since put in a backstop where they would cover all of the deposits in full of everyone banking with Silicon Valley
Crypto Industry Reactions to SVB Collapse
00:11:05
Speaker
Bank. And it's important to know that only, like traditionally, $250,000 worth of your deposits are covered by FDIC insurance.
00:11:15
Speaker
That is a concern because, yeah, if you're a startup and you raise $10 million, which is pretty common in a bank like Silicon Valley Bank, you put it all in Silicon Valley Bank, you probably want a little bit more than 250,000 of that back. So that's how we got to this kind of stage. And then it kind of felt like we went into a whole new level of chaos with Circle Austin, right?
00:11:43
Speaker
Oh, yeah. So of course, you know, during all of this chaos over the weekends when we were sort of in limbo, you may have recalled Matt like.
00:11:54
Speaker
Going into Friday, nobody was really clear whether depositors funds would be covered. And it was over the weekend that the FDIC stepped in. And of course, during this time, the USDC stablecoin de pegged. And this was because it turned out that Circle, which is the company behind USDC, announced that they had $3.3 billion of USDC reserves
00:12:24
Speaker
sitting in Silicon Valley Bank. So, USDC, when it de-pegged, fell to as low as $0.87, but it has since recovered on the news that the deposits were going to be saved. So, we're all right there. But that was a pretty wild time, quite the roller coaster, especially for people that, you know, are holding USDC, which has historically been
00:12:46
Speaker
You know guilty Yeah, that was that was fun waking up to my coin gecko alert of your USDC is 87 cents at 7 a.m. In the morning and you the UK all right well
00:13:02
Speaker
Ah, time to either take a haircut or strap in for the ride. It's like, great. Yeah, that was fun. That was not the sugar that you wanted to go with your morning tea. Exactly. Exactly, Austin. It certainly wasn't. Trying to toss in the British references. I appreciate it. It's good. It's good. I mean, it was crazy to see that.
00:13:28
Speaker
that's the first time in quite a while where i looked at a chart and i was like whoa like we are potentially like mega fucked at this point like if it cannot be understated like
00:13:43
Speaker
if USDC had have collapsed, like Luna style, how bad that would be. That would have truly nuked everything for quite some time. And you're looking at all of the other stablecoins that are quote unquote decentralized stablecoins, the DAI of the world, the FRAX, et cetera, et cetera, et cetera.
00:14:13
Speaker
Well, guess what? They're all partially collateralized by USDC. So when USDC falls, they fall. They were all crumbling. It was pretty much exclusively Tether, USDT, almost ironically, that held steady through all of this. It was actually proven to be the safe haven. Something I didn't think I'd be saying a few years ago.
00:14:39
Speaker
So, yeah, it was it was kind of crazy. And then, you know, we had more moves from the FDIC. Right. Yeah. So, right. In addition to all of the chaos that was happening with Silicon Valley Bank and its collapse and, of course, Silvergate, which we talked about last week, which was one of the two major crypto banks, the other major crypto bank being Signature Bank. Well, it turns out
00:15:08
Speaker
that the FDIC then moved in to close Signature Bank, which had a little over $110 billion in assets and was easily the largest crypto bank in the US. So once again, the Fed has put provisions in place to cover deposits. But what this means is that with SVB collapsing
00:15:33
Speaker
signature bank collapsing and Silvergate collapsing. You don't really have much of a place for crypto to participate in the traditional financial system, something we can get into a bit there, some interesting implications with that.
00:15:50
Speaker
uh in addition yeah go ahead matt have you been following this whole thing with like the signature bank stuff where there's been like a people involved in this that have been and i always struggle with this in like crypto twitter a little bit where there's been discussions that actually signature bank were
00:16:08
Speaker
like operating from a balance sheet perspective completely fine and the FDIC kind of moved in really on a big crackdown on the crypto side of things. I don't want to put my like tin full hat on but there seems to be a lot of like people inside that process that have been talking about this. Have you followed any of this stuff?
00:16:29
Speaker
Yeah, I've been seeing a lot of that. I don't totally know what I feel about this. Yeah, I think there's more to come to light. But yeah, you're right. I mean, what this means, as I mentioned, like with the loss of Silvergate and now signature, basically, crypto companies are locked out of the traditional finance system. And actually, I was reading that in Bloomberg,
00:16:50
Speaker
that the seizure of Signature Bank by New York regulators, it actually came as a total surprise to Signature Bank's management team. And yeah, you've seen people in the industry kind of speculating as to whether it actually needed to be seized in the first place. And if it didn't need to be seized, like why was it seized? I saw Barney Frank, he's an ex-Congressman that was behind the Dodd-Frank Act, and he's actually now a Signature Bank board member.
00:17:19
Speaker
He was pretty clear about this. He said that the shutdown sends, quote, a very strong anti-crypto message. Yeah, there were a few other people that spoke. Caitlin Long, the CEO and founder of Custodia, which is a crypto bank as well, said
00:17:35
Speaker
quote, certainly since the beginning of the year, the de-banking of the crypto industry has been happening. I trust what Barney Frank said. He had no reason to lie. And then another one that I pulled is I saw that Sheila Warren, who is the CEO of the Crypto Council for Innovation,
00:17:52
Speaker
said that recent statements from regulators, quote, seem to amount to de facto bans on dealing with all crypto companies, regardless of their business practices. Now, this is interesting to me because you may recall like back in December, there were a bunch of US lawmakers that did write a letter to the Fed demanding information on
00:18:13
Speaker
banks ties to crypto in the US, and in it, Democrat senators Elizabeth Warren and Tina Smith warned of mainstream banks ties to crypto, and they actually mentioned Signature Bank and Silver Gate by name. So yeah, I can see where some of these theories come from, basically.
00:18:37
Speaker
Yeah. And you know, so Signature Bank had a pretty sizable arm over in the UK as well, which actually the UK subsidiary was purchased on Monday by HSBC over here. And there has just been like,
00:18:55
Speaker
a lot of knee-jerk, anti-crypto stuff happening in banking over here. So one of our big consumer-based banks, Netwest, has actually put a limit
00:19:13
Speaker
on anyone's individual banking account of £1,000 sterling per day and £5,000 per month total that you can transfer to any crypto exchange. You cannot transfer anymore. And there is this big sentiment that I think is coming from the US and is shifting over here into the UK pretty significantly.
00:19:38
Speaker
trying to get cash into a crypto exchange is getting so much more difficult over here. And I've had a lot of trouble in the past taking fiat from a crypto exchange to the point where I've actually had bank accounts closed simply by doing a legit transfer of funds into my bank.
00:19:59
Speaker
And I transferred over some cash into a major exchange. Let's say I won't name it. There's nothing bad about the exchange. I just don't want to like cause any unnecessary drama via bank transfer, like usual, usual via my account. And my bank held.
00:20:17
Speaker
the wire, wouldn't release it, called me and was like, hey, is this for an investment or is it for crypto? And I was like, I'm funding in my crypto brokerage. And they were like, we're going to need more information on it. I was on the call for 15 minutes where they were running through loads of details, making me do disclaimers. And I was like,
00:20:39
Speaker
like, it wasn't a small amount of cash, but it wasn't a major amount of cash. It wasn't six figures of cash, let's put it that way. And honestly, you would have thought I was transferring in like 10 million. They held the wire for three days before they would release it. It is just getting really difficult, really, really difficult. And it
00:21:00
Speaker
hurts consumers and it really does it confuses me a lot of this stuff yeah you know the same thing actually happened to me i was telling you before we started recording um i uh i also had uh transfers blocked and basically missed out on the entire dip that happened uh recently over the past couple weeks um because of that and what's so bizarre about it is that
00:21:28
Speaker
I have a long-standing history of doing this. None of these transfers to the exchange from the financial institutions that I bank with were out of the ordinary.
00:21:46
Speaker
And yet they got blocked, which is just the timing of that was fantastic. Oh, that's great. Excellent.
Systemic Risks and the Need for Banking Diversification
00:21:53
Speaker
Wait for the wait for the all time highs and then those DCAs will be re-enabled. Exactly. Well, so kind of coming back to the SVB stuff, right? So one of the big fallouts from this is everyone's been looking at this. And I think the crux of all of this here is there's one piece where you've got this concentration of
00:22:14
Speaker
highly volatile businesses, or at least very concentrated businesses that make up the customer base of SPV. That clearly can be advantageous in times where that sector is up, but it can be very, very detrimental when that sector is down. Impacts deposits, impacts like a whole host of things, right? Especially like default on lending, et cetera, et cetera, et cetera.
00:22:43
Speaker
The real thing in all of this, though, is much less about that and is much more about the Silicon Valley Bank's approach to risk management. First of all, they tied up an obscene amount of their capital
00:22:59
Speaker
making it largely illiquid for all intents and purposes into long dated US Treasury bills. Bear in mind, for example, Circle with their reserves that they hold for USDC is just a great example, right? Because it's like billions of dollars of reserves that are held there.
00:23:18
Speaker
You have some of that held in cash, but the majority of it is in government-backed securities like Treasury bills. The longest dated Treasury bill that they hold is a 30-day bill for this exact reason. If there is a run and they need immediate liquidity, they can sell it with either zero to minimal volatility. And I think that is the key piece.
00:23:44
Speaker
The bank is taking deposits and it is trying to create profits by installing risk.
00:23:52
Speaker
If you are going to create some additional risk for upside in like treasuries, long-dated treasuries, one, you know, needs to be, first of all, probably reasonable rewards that they have to pay out. In that case, it just wasn't. Interest rates were at their lowest times. Like the crappiest time to buy treasuries, right? In most countries at that point in 2021.
00:24:17
Speaker
But most importantly, number two, is that there needs to be a hedged kind of bet on the other side that protects them from downside. And they did not hedge this position to any kind of level. So it just exposed them huge, huge amounts. And the panic that kind of ensued, especially near the start of this week's kind of tapered off a little bit now, is everyone was looking at this and going, okay, well,
00:24:44
Speaker
What else do we not know about some of these smaller banks? And I mentioned earlier, right, that the total assets that they held at Silicon Valley Bank, it was over $200 billion and under $250 billion.
00:25:02
Speaker
Why am I making that point? I'm making that point because once you hold over $250 billion in assets, you become what's known as a G-SIP, or at least a SIP, a Systemically Important Bank. In many cases, this means that, one, the bank reaches such a size of assets that if it goes down, there is systemic risk across other banks. And what that largely results in is that a central bank is
00:25:29
Speaker
kind of obliged to bail you out if you're a G-Sip.
00:25:34
Speaker
At the same time, you also have much stricter regulation and guidelines and the things that you can and can't do with depositor's cash. So they wouldn't have been able to make the kind of bets that they made without adequate hedging. So all of this, they have remained in this level of capital very strategically. So people are looking at this and they're going, okay, well, what about some of these other regional banks? And I think First Republic Bank was one where people were like,
00:26:03
Speaker
maybe First Republic Bank is poisonous. And we saw on Monday just the most monumental drawdown in regional bank stocks that we've probably seen in a long, long time. First Republic Bank went down nearly 50% in a single day. Tuesday, also what a trade that is if you bought the bottom. Because Tuesday, they nearly all rebounded. And I know we can probably
00:26:28
Speaker
rule out systemic risk that's in place. There's a lot of good stuff that happened off the back of the financial crisis with interbank lending and systemic risk and things like that. But I think those concerns around whether there's systemic risk in the banking sector coming from the collapse of SPB
00:26:48
Speaker
I think consensus, I think it's probably fair to say, Austin, that there isn't. Yeah. But where SVB has kind of like been really poison chalices, they're this highly concentrated deposit pool. I don't think that's ever a good thing. And they combine that with huge risk and capital. So this is not good. I think what we really need, in particular in crypto, but generous speaking, but in particular with crypto,
00:27:17
Speaker
We need more openness from mainstream banks, in particular SIBs, like Systemically Important Banks, to support the banking of crypto companies and key infrastructure. Like, crypto banks.
00:27:30
Speaker
aren't a good thing. They're like a necessary evil because when a single bank, and maybe evil is the wrong word because I think what they're doing is really important and it's fantastic and they're taking a huge bet, but it's not great. They're like a compromise, a necessary compromise. That's a better way to put it, for sure. Because when a single bank has the majority of its exposure to crypto or any sector, right? This isn't just a crypto problem, but we are largely unbanked in crypto right now.
00:28:00
Speaker
it becomes so much more vulnerable to market conditions. We need crypto companies and infrastructure to be powered through diversified banking pools so that when there are large drawdowns in crypto, which will always happen, as will happen in all sectors, it can be balanced and hedged across other industries so that 90% of all your depositors aren't kind of all getting hit at the same time.
00:28:26
Speaker
So I think that's like my soapbox here. And I think like the call for like more crypto banks is not what we need. It's actually that we need better adoption and openness in regular mainstream diversified banks. And unfortunately, it seems like we're almost heading the opposite direction because everyone's kind of spooked by this.
00:28:48
Speaker
Yeah, yeah. Also, we need DeFi and peer-to-peer transfers and all that stuff too, right? Here's an interesting thing to think about though, Matt. We talk about SVB and its concentrated depositor pool and the risk that they took with their capital. And I feel like over and over and over again,
00:29:11
Speaker
When these stories unfold, you know, hindsight is so 2020 and we can say like, Oh, you know, look at like what was going on there. Like obviously there were, there were issues with their approach to T-bills and everything like that. Um, but fun fact, as of just a couple of days before SVB collapsed, they actually had a Moody's credit rating of a. Unbelievable, isn't it? It's, it's actually unbelievable. Like what a bank regulator is looking at, like, you know,
00:29:42
Speaker
I've seen so much stuff where it's like, well, you know, companies need to do better diligence of the banks that they're banking with. I'm sorry. What? Am I going to go through the balance sheet of my bank?
00:29:56
Speaker
You know, if there is an institution that I am supposed to trust, these giant things. I was listening to a fantastic podcast right around this and we're talking about the architecture of banks, which generally wouldn't be that particularly interesting. But, you know, every bank that's created
00:30:16
Speaker
they they're always in these really historic looking buildings they have these giant pillars outside them and they just look like fortresses and in many cases they don't actually hold a vault or anything between them the whole focus is their entire business is built around confidence trust safe like safe as money in the bank right you know this is the way that they need to be interpreted because if as we've seen confidence falters
00:30:45
Speaker
it can create a knock-on effect that can result in things like a bank run happening. Now I will say that the other kind of piece in this that I really hate, that's kind of been a narrative happening in the past kind of at least the weekend and the few days after this is,
00:31:08
Speaker
people blaming venture capitalists for causing a run on the bank. I'm like, I'm sorry. If you have concerns about the banks that are funding startups in your phone, it's basically a fiduciary duty that you would say, hey, you need to get out of this. What, you're just gonna be the last person standing while and go down with the ship. You would expect that a bank
00:31:34
Speaker
has capital, has hedged their bets, has risk management in place, that they can manage solid runs on their bank. That is their literal point of existence. It drives me nuts, actually, this whole thing. I'm not going to be the spokesperson for VCs. There's a lot bad about that industry.
00:31:57
Speaker
But in this case, and in particular, I'm not a huge fan of Peter Thiel, but people putting this on Peter Thiel absconds all of the enormous responsibility that the negligence of the SVB team and some of the other banks involved have had in place. And I don't think it's fair.
00:32:17
Speaker
Yeah, I think that's a really good point. And it actually kind of brings up this question that has been floating around in my head as we've gone through this, which is, shouldn't banks either pay higher yields to their depositors or just stop investing their deposits? If I give you $1,
00:32:37
Speaker
and you loan out $10 with that $1 and I get nothing in return. Like, am I not getting screwed on both ends here, right? Like if I wanted yields, theoretically, I could invest with a hedge fund, but then I'm taking on risk. I'm assuming some risk, right? Fair. If I want security, I should be able to put my money in a bank and not get yields, but like know that my money is there and that it's safe and it's being looked after, right? But if I'm putting my money in a bank,
00:33:06
Speaker
And then they're investing my deposits almost, and I'm obviously exaggerating here, but it's like you're almost behaving like a hedge fund. So there I'm taking on risk and I'm not getting any yield. Like, how are we actually all right with this? I think that that's something that needs to be overhauled within the banking sector as a result of this as
Why Don't Banks Offer Higher Yields?
00:33:27
Speaker
well. It's like, hey, guys, if you're going to take my deposits, which are supposed to be safe,
00:33:31
Speaker
And then you're going to invest them in these long-term T-bills, which I understand are also supposed to be safe. But still, look at what has happened. And then you're going to collapse. I'm not going to have access to my funds. And the government is going to have to come in and quote, backstop, aka bailout, in my opinion, on the backs of
00:33:54
Speaker
the US financial system and taxpayers and all of this stuff, why am I not getting a piece of the upside from that risk? I think this is a key point, and I actually think this pulls on something that hasn't been discussed a whole lot in this whole debate, which is very interesting to me.
00:34:11
Speaker
So one of the things that actually with SVB really can contribute even more to them being squeezed on both sides of like having this long dated treasury is the fact that
00:34:27
Speaker
Unlike with regular consumer banks, so a regular consumer bank, you go into your savings account, unless you have some cash in there and you look at like the interest rate that you're getting on your savings. And like in the UK, like interest rates that you're getting, like in many consumer banks are still under 1%, right? It makes no sense, but nobody complains because no one kind of gives a shit, right? With their current account, their checking account.
00:34:53
Speaker
They don't care enough to kick up a fuss about it. I'll tell you who does care enough. Companies. And when you're a commercial bank, they really push harder and harder, and a lot of what they're going to push for where they put their cash, especially if you've just had, for example, 10 million in funding, is
00:35:13
Speaker
interest rates and what they're going to earn returns on. And that's where Silicon Valley Bank being a large commercial bank in a venture capital fueled sector got squeezed a lot more because actually they did have to pass on a lot more of that interest rate yield to their depositors, which means they were kind of creaming a lot less off the top. Consumer banks
00:35:35
Speaker
It's been an absolute cash cow interest rates going up through this past year, well, at least this past kind of six months, because they have not been passing this on to their customers. I kind of think this is like borderline criminal. People just don't care enough because they don't hold enough cash really for it to be meaningful. And maybe actually people don't even think about it in that way as much. I don't. I don't even think about it. And I'm talking about this right now.
00:36:05
Speaker
That's an interesting piece in all of this. And I think that's another thing that is going to get a light shone on it a little bit more as we remain in a high rate environment. Or at least that's what we think we're going to remain in. And this is another thing we haven't talked about is what's going to happen on March 22 when a Fed, if you'd have said to me this time last week, I think we were talking about it briefly and we were saying, well,
00:36:32
Speaker
It's at minimum gonna be 25 basis points, but the futures market just a week ago was predicting a higher likelihood of a 50 basis point rise. Now, futures market is saying anywhere between zero and 25 basis points is gonna happen. Some big funds are making bets that there's actually gonna be a rate reduction because of the stress on the banking system that's happening right now.
00:36:59
Speaker
What a new turn this is and what a dilemma it actually is for the Fed right now as well. Yeah, I mean, I think that a good analogy that I saw, if you look at the sort of rates chart over the course of the past couple of years, it really it does look like a roller coaster. Or another way to put it is that the Fed is the pilot of the plane, which is our financial system. And they, you know, they jerked the yoke up.
00:37:29
Speaker
and sent the plane up into the fricking stratosphere. And then immediately after, when COVID hit, jerked it down. And then once inflation hit, jerked it back up again, and we've gone way further than we went before. And look, I'm not saying that personally, I think that rates needed to rise. We need to battle inflation. But the reason why is because we've been in this zero interest rate
00:37:59
Speaker
Environment for like over ten years and then we printed trillions of dollars you know during covet and everything like that.
00:38:07
Speaker
Uh, so the fed has also put us into that position in the first place. Uh, and it just seems to me like it feels like a lot of very risky policy that has led to this and the thought of yet another fed pivot. I mean, it's just crazy. Yeah. I think everyone's, everyone's sick bag in the, uh, in the plane is already full, right? So any more sudden movements and where we're going to have a real messy situation.
Market Reactions Amid Banking Turmoil
00:38:33
Speaker
So I think like the, this is kind of the crazy thing. I think.
00:38:37
Speaker
You know, we had the CPI come out on Tuesday, I think it was, Monday, Tuesday. And things weren't as low, I think, as maybe the Fed hoped, but they certainly weren't as high as they could have been. It didn't come in quite as hot. So that maybe helped a little bit in there. I think we're going to be netting out a 25 basis points increase. I just can't see. Well, first of all,
00:39:07
Speaker
I'd gamble what little USDC that I have left on definitely not being a rate reduction. I think that would be a wild thing to happen. I think the most bullish case in the market's perspective would be a pause on rate hikes. But I just still think if they start slowing down now, especially as we're seeing a real lack of systemic risk,
00:39:36
Speaker
they're going to see the knock-on effects into inflation. And I think this is one of the reasons why we're talking about all this. And I think rightly so. I've seen a lot of people asking about this, where it's like, wait, you're telling me all these banks are collapsing. All this bad stuff's happening. It's doomsday, et cetera. But everything's up.
00:39:54
Speaker
My equities are up, my crypto is up. Why? Well, I'll tell you why. Because there is a one, a very, very high likelihood that rates are not going to increase as quickly. So that's one big piece that's happening here.
00:40:15
Speaker
bond yields are coming down. And also all of these bailouts, there's a ton more liquidity coming into the market. I mean, outside of the US, we haven't even talked about this, right? But Credit Suisse, you know, that wonderful bank that's run really, really well. I was tweeting about this a couple of days ago, right? And yeah, they just received, what, $54 billion nearly from the central bank of Switzerland that's just been injected into them to
00:40:41
Speaker
probably prolong their inevitable collapse at some point, and this is going to continue to be the case. That backstop, that bailout you're talking about, Austin, that is money coming back into the system that is a huge amount of capital being flowing out.
00:41:01
Speaker
It absolutely is. And it just blows my mind that there is such an effort to change the language around this so as to not call it a bailout.
Are Recent Interventions Bailouts?
00:41:13
Speaker
Of course, there is nuance to this. But to your point, Matt, the reality is that hundreds of billions of dollars in capital are going to be
00:41:22
Speaker
flooding the system and also are going to be infused into SVB under management of the FDIC to prevent this collapse, to bail it out. The FDIC, as we mentioned earlier, ensures up to $250,000 in deposits, but with this, quote, backstop,
00:41:42
Speaker
They're going to be covering all deposits, and that amounts to $175 billion. That's a ton of money. Still, Bill Ackman insisted in his gigantic tweet thread on starting it with no paragraphs in any of these long tweets. Bill Ackman is fucking killing me at the moment with these things.
00:42:02
Speaker
Like, can somebody show him the return key? It is driving me insane. Yeah. But of course you saw that. He started it with, this was not a bailout. I mean, okay, I think your point about VCs earlier, like, you know, not pinning the bank run on them is I'm with you on that. But the level of effort that VCs have made
00:42:24
Speaker
to push for this bailout and then to claim that it's not a bailout when at the same time always pointing the finger anytime any other industry gets bailed out. Do I blame them?
00:42:36
Speaker
Not necessarily, but look, you're not operating on your capitalistic principles here, okay? In a proper capitalistic system, we would allow banks, institutions, companies to fail because that's how it's supposed to work, like the survival of the fittest, right? Of course, the contagion from this would be incredible and it would spread to other areas of the economy, potentially the global economy.
00:43:02
Speaker
So I'm not saying that I'm against this entirely. I'm just saying like this is not a very principled take. It's not a very honest take. I was reading this quote from Neil Borowski, who oversaw the troubled asset relief program, which was basically
00:43:18
Speaker
heavily involved in saving the banking banking industry in 2008. And he said, quote, if your definition is government intervention to prevent private losses, then this is certainly a bailout. Okay. This, this is, this looks a lot like a bailout and our resistance to calling it that I think is disingenuous at best, if not dishonest. Okay. Now, to be clear, $200 billion of SVB assets are being auctioned off to help cover this. There's going to be some special assessments made on banks.
00:43:48
Speaker
which is basically a tax that larger banks will pay, which of course will make their way back into the system. Those are distressed assets that we're talking about. I don't think they're going to sell at their market value. They'll sell at market value, which is for a distressed asset. So of course, the FDIC is going to have to infuse capital into this. I do want to be clear that stockholders and executives at SVB are not being bailed out, which maybe is an important
00:44:16
Speaker
characteristic that is different from the GFC. But even so, this quote from Richard Squire, who is a professor at Fordham University School of Law and an expert on bank bailouts, I think summarizes this pretty well. He says, quote, what they mean when they say this isn't a bailout is it's not a bailout for management. The venture capital firms and the startups are being bailed out. There is no doubt about that. Yeah. And then Squire went on to say,
00:44:45
Speaker
When top White House officials avoid the B word, they are trying to not be brushed with the tar of the 2008 financial crisis. And that's what I think is really the root of all of this, is that Washington has learned that
00:45:01
Speaker
Bailouts are politically unpopular. And that's what I mean. And this is all in the background of the run up to what is happening very, very soon, which is the next election. This is the kind of crazy point in all this. It's also worth calling out.
00:45:18
Speaker
We'll probably be talking about this next week, I imagine. The SEC is starting an investigation on some of the executive team at SVP for them dumping a shit ton of their own stock in the week running up to the bank's collapse. This is going to get ugly. I can tell you that. Oh, it certainly is.
00:45:38
Speaker
But this is something, a theme that has really upset me over the past couple years, is this redefinition of fundamental terms or a resistance to using the right term to describe the scenario because it's politically inconvenient. This is so similar to the resistance to using the term recession to describe the economic situation that we've been in for the last
00:46:06
Speaker
six months, a year or so, right?
Future of Crypto Banking Legislation
00:46:09
Speaker
We're redefining terms that are so fundamental to the way that we run our
00:46:16
Speaker
economy and our banking system and that we build the trust that is so critical to what makes banks and markets work. I thought that this additional quote from Squire summed it up. He said, if we use a different term, we're serving the interest of those who want to obscure what is really happening here. And what he's saying is it's a bailout.
00:46:38
Speaker
if we're using the word backstop, we're obscuring the reality. And I think that's something that plays into this even more. Look, we're in the early days of this, folks. Promises are being made. Oh, the executives and the VCs, they're not going to be bailed out. They're not going to go on their AIG-style trip to Vegas. That's not going to happen. That took months for those types of things to come to light. And you can already start to see concerning things popping up. For example, last night, JP Morgan
00:47:07
Speaker
said that the Fed's emergency loan program may inject as much as $2 trillion of funds into the U.S. banking system to ease the liquidity crunch. All right. This is like not even within a week of this happening. Oh, fire up the printers, baby. Let's go.
00:47:27
Speaker
Oh, it's going to get really interesting. Austin, I'm going to cut us off. We're going to wrap this up. We're going to fire it up. I'm fired up from this conversation. We're going to keep covering this. This is definitely to be continued. We're going to chat through some of this more next week and I'm sure we'll be covering the free money coming with Arbitrum on another note of printing. But I think this is
00:47:53
Speaker
It's a critical point in crypto, and I think this is going to shape long-lasting legislation. I think where we are today and what we're experiencing here, a lot of this happened. It began at the crumbling of FTX, and we're still seeing this be one of those big knock-on effects.
00:48:14
Speaker
My hope here is that we start to kind of move away and there isn't a really bad anti-crypto reaction, which is starting to happen. And then we can actually get sensible banking infrastructure in place and some good banking partners for the critical infrastructure that's powering crypto. We will see how it plays out. And I just hope that next week, we're not talking about the next big bank collapse. All right, Austin, until then, I'll see you next week. See you next week, back.
00:49:01
Speaker
The contents of the Decrypting Crypto podcast should not be used and are not intended as investment advice. Please do your own due diligence before making any investment, cryptocurrency or otherwise.