It’s no secret that governments despise cryptocurrencies they don’t control. And it’s easy to understand why.
Unlike traditional currencies, bitcoin and cryptocurrencies like it aren’t created out of thin air by a central bank engaged in “quantitative easing” or similar operations. Instead, they’re produced using computing power on distributed networks in a process called mining.
For instance, the mathematical rules that make bitcoin work limit the number of bitcoins that will ever be mined to 21 million. That means it’s impossible to debase bitcoin.
Cryptocurrencies like bitcoin are also decentralized. No central bank or other authority oversees operations. That means no central authority can “bail-in” a cryptocurrency. For instance, it would be impossible to do with bitcoin what the European Central Bank did to bank deposits in Cyprus in 2013. (The Cyprus bail-in cost depositors up to 100% of the value of their uninsured bank accounts.)
But would a government – Uncle Sam in this case – spark a bank run and a global financial crisis to destroy cryptocurrencies?
That’s the explosive allegation of venture capitalist Nic Carter. Last week, he laid out a case concluding that the Federal Reserve, acting with the blessing of high-level government officials, deliberately caused the collapse of Silvergate Bank and Signature Bank, two of the last crypto-friendly banks in the United States.
But events unfolded a bit differently from what the Fed intended. Not only did Silvergate and Signature fail, but a panic mentality took hold. Only two days after Silvergate shut down, Silicon Valley Bank (SVB) experienced the fastest bank run in history, with $42 billion withdrawn in a single day.
The FDIC had no choice but to close SVB, as we described in last week’s issue. And since then, it’s made heroic efforts to avoid having these failures trigger a global financial crisis.
According to Barney Frank, the former chairman of the House Financial Services Committee and a member of Signature’s board, regulators seized the bank “to send a message to get people away from crypto.” If true, the deliberate destruction of Silvergate and Signature is the most recent phase of Uncle Sam’s decade-long war on cryptocurrencies, which we most recently discussed in this dispatch from 2021.
The latest phase of this war began in November 2022; ostensibly to contain the fallout from the cascade of cryptocurrency-related business failures that year, culminating with the implosion of the FTX cryptocurrency exchange.
The FDIC and the Fed verbally warned banks that accepted crypto-related business that they should limit their exposure to 15% or less of their business. Then in January, in what appeared to be an orchestrated effort, the White House, the Fed, and the FDIC made it clear that any bank that accepted crypto-focused business would face greatly enhanced regulatory scrutiny. In addition, no new licenses to crypto-friendly banks would be issued.
Moreover, since failed cryptocurrency exchange FTX banked at Silvergate, investigations were launched seeking to tie the bank to wrongdoing at FTX. The assumption by investigators appeared to be that Silvergate had conspired with FTX founder Sam Bankman-Fried to defraud the exchange’s customers.
The outcome was entirely predictable. With rumors mounting that the bank was tied to criminal wrongdoing, depositors began pulling out of Silvergate. The bank closed on March 8.
Those of us with long memories may recall a similar effort by Uncle Sam from 2013-2017: Operation Choke Point. This was an effort by the Obama administration to persuade banks not to offer services to businesses it deemed undesirable – in particular precious metals and firearms dealers. And it’s worth mentioning that the current head of the FDIC – Martin Gruenberg – was the point man for this initiative.
In Operation Choke Point, regulators began to require that banks servicing politically incorrect businesses collect so much information about these customers that they made it unprofitable to service their accounts. Eventually, the FDIC prepared a list of 30 different industries that it viewed as high risk. In a process that came to be known as “de-risking,” banks began to close the accounts of these businesses to avoid a government witch-hunt.
By 2014, it was obvious Gruenberg had embarked on a systematic campaign to shut down politically disfavored businesses. Even The Economist magazine weighed in on the trend, noting that Chase Bank had closed the accounts of hundreds of porn stars.
In defending their actions against crypto-friendly banks in what amounts to Operation Choke Point 2.0, regulators would no doubt state that their intention is to avoid exposing the mainstream financial system to contagion from failed cryptocurrency businesses. But we think there could be a different agenda.
The manufactured crisis creates a perfect opportunity for an accelerated transition to a very different type of cryptocurrency – one issued and controlled by central banks; so-called “central bank digital currencies” (CBDCs).
Indeed, around 90% of global central banks are already in the process of adopting CBDCs. For instance, last November, the Federal Reserve Bank of New York launched a CBDC pilot program with major banks last month.
A lot of our clients are terrified of CBDCs, and for good reason. CBDCs could literally function as programmable money. Big Brother would have the ability not only to track every penny you earn or spend, but also to restrict how you spend it. And a law enforcement agency could conceivably turn off your money at the click of a mouse.
During economic downturns, CBDCs could also be programmed to have negative interest rates if you don’t spend them fast enough. They could also be restricted so that there’s no way to exchange them for cash (assuming it still exists), other currencies, or more reliable stores of value such as precious metals. Indeed, a central bank could impose capital controls at the click of a mouse.
All this makes us more enthusiastic about keeping a store of physical gold, silver, and cash close at hand. Not to mention a secure stash of assets offshore.
