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Borrowing Billions: Crypto Banks Seek Funding from Home-Loan Banks

January 28, 2023

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Borrowing Billions: Crypto Banks Seek Funding from Home-Loan Banks amid Digital Asset Withdrawal Boom

Man withdraws cash from ATM Crypto Banks
Billions of dollars have been withdrawn from crypto wallets. Photo by Aysegul Alp

Reverberations from the FTX collapse are still being felt throughout the cryptosphere.

When crypto prices crashed and FTX, one of the biggest exchanges in the industry, filed for bankruptcy, Silvergate Capital and Signature Bank started losing deposits.

Signature Bank (NASDAQ: SBNY) and Silvergate Capital Corp. (NYSE: SI), two of the biggest banks that work with cryptocurrency companies, have borrowed billions of dollars from Federal Home Loan Banks to cope with a flood of customer withdrawals.

In the fourth quarter, Signature Bank borrowed almost $10 billion, and Silvergate Capital Corp. borrowed at least $3.6 billion to cover the huge influx of customer withdrawals from shaken investors who had lost trust and wanted their money out. These are some pretty astronomical figures.

Earlier this month, the Wall Street Journal reported that Silvergate had to sell assets at a significant loss to cover withdrawals of about $8.1 billion. The bank also fired 40% of its employees and gave up on plans to start its own digital currency, writing off the $196 million it had spent on the technology. Yikes.

Many commentators have said that using the home-loan bank system, which was made to help with mortgage lending, to backstop the crypto industry’s fallout is far from what it was made for. Critics are pointing out that taxpayers should not shoulder the burden for the mistakes and failures of a select few who have hollowed out the crypto market.

A small model house next to some keys Crypto Banks
Home loan banks are being used to bail out crypto banks. Photo by Tierra Mallorca on Unsplash

Federal Home Loan Banks, which are made up of 11 government-chartered cooperatives, were set up to help people pay for homes during the Great Depression. Now, they also provide liquidity to the banking system by using the fact that they are backed by the government to borrow money at low rates.

Senator Elizabeth Warren (D., Mass.) strongly opposed this safety net for the crypto industry, which would cost the taxpayer billions of dollars: “This is why I’ve been warning about how dangerous it could be to let crypto become part of the banking system. In no way should collapses in the crypto industry…be left to the taxpayers to pay for.”

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