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The Senate Banking Committee is scheduled to meet Thursday to consider a cryptocurrency bill that would further fulfill many of the promises President Donald Trump has made to his cryptocurrency billionaire friends. As Congress races to complete its crypto industry wish list before the midterm elections, it should remember what happened the last time crypto impacted legacy banking. We’ve seen this movie before, but the taxpayers paid for the tickets.
Last September, as ranking member of the Senate Permanent Subcommittee on Investigations, I released a 292-page report documenting how three of America’s largest banks underwent questionable audits of soundness shortly before catastrophic failures cost bank customers millions of dollars.
Our research provides a unique perspective on how cryptocurrencies can quickly move from innovation to contagion. Silicon Valley Bank, Signature Bank, and First Republic Bank profited during the venture capital and crypto boom, but they learned that tech money comes fast but goes out even faster, threatening the stability of banking and costing taxpayers and investors. These bank failures serve as a chilling warning to supporters of the crypto lobby’s efforts to further entrench the unsavory world of cryptocurrencies into the American economy.
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Silicon Valley Bank collapsed following the collapse of trading company FTX, a downturn in the Bitcoin market, and the closure of Silver Gate Bank, which specialized in cryptocurrencies. Once their bet became clear in early 2023, crypto industry insiders pushed for a bailout and fueled panic to accelerate the run. The resulting chaos threatened major technology companies and millions of depositors, ultimately requiring a $340 billion intervention by the federal government to quell fears of infection. Still, bank failures have left more than $54 billion in stocks and bonds worthless, including $700 million lost in one day by one pension fund. Unless Congress takes action to put some guardrails on the recently passed GENIUS Act, it’s only a matter of time before industry calls for bailouts rise again.
The historic speed of deposit flight at these banks proved how fast and reckless modern finance is becoming, especially with the introduction of crypto companies into the banking system. While technology has made banking faster, it has also made it faster to fail. The rise of cryptocurrencies in the banking system increases the systemic risk of financial instability. Signature Bank is a clear example. In the months following the FTX collapse, the company collapsed after large amounts of crypto-related deposits left banks. The complexity and opacity of cryptocurrency markets also undermines traditional oversight functions. Signature Bank’s auditors failed to grasp the risks and, year after year, repeatedly assured the public that everything was fine. But opacity isn’t a bug in cryptocurrencies, it’s a business model.
Now, the crypto industry is spending millions of dollars lobbying Congress and the Trump administration to let it forget its past and take over banking operations and create its own investment rules. Cryptocurrencies are encouraging U.S. consumers to abandon traditional bank accounts in favor of “digital dollars” called stablecoins. The industry is even trying to replace savings accounts by offering token “yields” (the equivalent of interest on cryptocurrencies). While this new form of digital currency may sound appealing, stablecoins lack the basic safeguards that protected Silicon Valley banks’ depositors during their 2023 collapse.
The Silicon Valley bank failure and the ensuing chaos should have been a lesson to keep cryptocurrencies out of the financial system. The failure of Silicon Valley Bank was not the fault of a few bad managers or one auditor’s reckless reporting. The cozy audits these banks have undergone over the years reveal a fundamental tenet of finance: when profits are private and losses are public, recklessness thrives.
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The virtual currency market is currently in turmoil. Since the GENIUS Act was passed last summer, six major stablecoins have been “unpegged” and unlinked to currencies they claim to have a one-to-one relationship with, wiping out hundreds of millions of dollars for those who hold the tokens. But this is just a small beginning. The current stablecoin market is approximately $300 billion. Coinbase’s CEO recently predicted that cryptocurrency volatility could quadruple by 2030. Given the impact crypto volatility has had on local banks in 2023 after the FTX collapse, what threat could it pose if millions of Americans’ savings and more banks rely on cryptocurrencies?
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My research revealed that Signature Bank’s auditors were joking with each other when the bank failed. They thought the management was stupid. Because they rely on cryptocurrencies to boost their numbers and “look cool…and then wonder why the floor is falling out and falling apart.” That casual irony captures the deep failings exposed by the 2023 bank failure. When crypto-driven risks turn profitable, those charged with policing them will look the other way.
As the Senate Banking Committee prepares to consider the Cryptocurrency Market Structure Act, Congress must remember that the failure of Silicon Valley banks was not a coincidence, but a premonition. The failure revealed that crypto-related deposits, digital speed runs, and opaque markets can overwhelm regulators before risks materialize. But the legislation currently being considered would push that volatility even deeper into the financial system under the guise of innovation and transparency. If lawmakers fail to confront the lessons of 2023, they will lock in the same vulnerabilities that forced taxpayers to intervene in the past, and they will inevitably be asked to do so again.
