To make customer withdrawals easier, two banks in the bitcoin business have used the federal mortgage system.
The Federal Home Loan Banks, a system established to support mortgage lending during the Great Depression, have provided billions of dollars in loans to Silvergate Capital and Signature Bank, according to Saturday’s Wall Street Journal (WSJ) story (Jan. 21).
According to the research, which used securities filings as evidence, Signature borrowed roughly $10 billion in the fourth quarter, while Silvergate borrowed $3.6 billion.
The announcement follows allegations that both banks reported an increase in customer withdrawals of funds tied to cryptocurrencies, and it comes as the sector as a whole continues to recover from FTX’s collapse and a broader slowdown last year.
The WSJ points out that while Silvergate had no home-loan bank borrowings the prior year, borrowings at Signature, which mostly dealt in multifamily real estate before entering the cryptocurrency market, are more than double the maximum amount they have borrowed in several years.
Silvergate reported a $1 billion loss for the fourth quarter of 2022 during a recent earnings call. According to CEO Alan Lane, the bank intends to stop providing some cash management services, some crypto custody services, and a portion of its portfolio of digital asset products.
In the final three months of 2022, Silvergate’s clients withdrew almost $8.1 billion in deposits when FTX collapsed.
The “discussion around cryptocurrencies and their credibility has gotten increasingly divided,” according to a report by PYMNTS last week. Japan is pleading for authorities everywhere to handle cryptocurrency companies with the same level of regulation as they do conventional banks.
According to Mamoru Yanase, deputy director-general of the Financial Services Agency’s Strategy Development and Management Bureau, “if you wish to implement effective regulation, you have to do the same as you regulate and monitor traditional institutions.” Not the crypto technology itself, but loose governance, lax internal controls, and a lack of regulation and oversight are to blame for the most recent debacle.
Similarly, senators Elizabeth Warren of Massachusetts and Tina Smith of Minnesota wrote to federal financial authorities late in the previous year to inquire about how they determine the exposure of the banking system to cryptocurrency risk.
The senators said, “Banks’ partnerships with cryptocurrency firms raise concerns about the safety and soundness of our banking system and highlight potential gaps that cryptocurrency firms may try to exploit to obtain more access to banks.”
