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But once FTX collapsed, Silvergate customers fled (withdrawing $8.1 billion in the fourth quarter, aka roughly 70% of total deposits) and U.S. Senator Elizabeth Warren (D-Mass.) sent it a scathing letter. The stock price tanked, down more than 40% in the past month.
Now I'm not here to spread fear that Silvergate is insolvent. After all, Silvergate satisfied the customer withdrawals and has started leaning into cost cuts by way of laying off 40% of its staff and abandoning expensive ideas like the Diem project it bought from Meta Platforms (META) early last year.
What is worth highlighting here, though, is how Silvergate satisfied those customer withdrawals.
Silvergate Used Something Meant for Housing as a Lifeline |
In November, I wrote that the crypto credit contagion was "unlikely to spread to other markets," but Silvergate just proved me wrong. To satisfy the spike in withdrawals, Silvergate received billions of dollars in advances from the Federal Home Loan Bank (FHLB) of San Francisco, ending 2022 with $4.3 billion of FHLB money on its balance sheet. For context, Silvergate held just $700 million of these advances at the end of September 2022.
To be honest, I wasn't (and am still not really) intimately familiar with the FHLB when I first read about this – but if the name of the organization wasn't a dead giveaway that this was strange, then its mission statement stating that the FHLB provides "members with a reliable source of funding for housing finance" should.
(As everyone says, you can't live on the blockchain.)
The FHLBank System was created under President Herbert Hoover through the Federal Home Loan Bank Act in 1932 with one big goal: lower the cost of home ownership. It empowered FHLB banks to provide liquidity to its smaller member banks, of which Silvergate is one. So, yes, part of the crypto industry was effectively bailed out by a government-sponsored institution whose stated goal is to curtail housing costs.
Of course, this isn't illegal – else you'd be hearing about it from literally everyone but me. The FHLB is also tasked with providing "liquidity for members' short-term needs" – and the 70% withdrawal I mentioned above sure seems like a time when liquidity might be needed! Plus, FHLB supports members who support housing finance and community investment (whatever that means).
Enough ambiguity to not be illegal.
But just because it's not illegal doesn't mean that we should be happy with it. Sure, I'm glad Silvergate didn't go under, but isn't this just another bailout? Crypto supporters would be hard-pressed to convince investors that crypto is legitimate if there's a government program propping up part of it.
Does crypto need propping up because, well, if so, maybe it shouldn't be up in the first place?
Seriously, if someone, like a bank, doesn't want to bear the downside risk of investing in crypto then maybe an entire depositor cohort and loan book shouldn't be made up almost exclusively of crypto companies. Perhaps banking institutions should do risk management through either stricter collateralization rules or broad diversification across many other industries.
Not to mention, FHLB advances work such that in the event of a bank failure, it is senior even to the Federal Depository Insurance Corporation's (FDIC) claims. Why is that important? As John Heltman wrote in American Banker, hypothetically "if regulators were to shut down Silvergate or a similar bank that facilitates crypto and owes a Home Loan bank money, the failure could prove more costly to the [FDIC's] Deposit Insurance Fund." Such a scenario wouldn't be catastrophic for the agency whose stickers appear on the door of every bank in America, but it would underscore that crypto is no longer just an island.
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