SEN RICHARD BLUMENTHAL: Congress could be inviting another crypto-fueled bank collapse
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The Senate Banking Committee will hold a hearing on Thursday to determine crypto legislation that would further fulfill many of the promises President Donald Trump made to his crypto billionaire friends. Congress, racing to complete the crypto industry’s wish list before the midterms, should remember what happened the last time cryptocurrency impacted legacy banking. We’ve seen this movie before, and taxpayers were paying for the tickets.
Last September, as the ranking member of the Senate Permanent Subcommittee on Investigations, I released a 292-page report documenting how three major American banks received questionable audits that showed they were sound just before their catastrophic failures cost bank customers millions.
Our research has given us a unique window into how cryptocurrency can quickly move from innovation to contagion. Silicon Valley Bank, Signature Bank and First Republic Bank profited as venture capital and cryptocurrency took off, but they all learned that tech money comes fast but goes even faster; This threatens the stability of banking and leaves taxpayers and investors vulnerable to losses. These bank failures provide a chilling warning to anyone who supports the crypto lobby’s efforts to further entrench the ugly crypto world into the American economy.
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Silicon Valley Bank collapsed following the failure of trading firm FTX, the downturn in the Bitcoin market and the closure of crypto-focused Silvergate Bank. In early 2023, as the bets unraveled, crypto industry insiders pushed for bailouts, fueling panic that precipitated bank runs. The resulting turmoil threatened major tech companies and millions of depositors and ultimately required $340 billion in federal intervention to quell fears of the spread. Even then, more than $54 billion in stocks and bonds became worthless when the banks collapsed; This includes $700 million lost in one day by a pension fund. Unless Congress acts to put some roadblocks in the recently passed GENIUS Act, it will only be a matter of time before the industry cries for a bailout again.
The historical pace of deposit flow in these banks showed how fast and reckless modern finance has become, especially with the introduction of crypto companies into the banking system. Technology has made banking faster, and it has made failures faster. More crypto in the banking system increases the risk of systemic financial instability. Signature Bank is a clear example: It collapsed in the months following FTX’s collapse when significant amounts of cryptocurrency-related deposits flooded the bank. The complexity and transparency of crypto markets also undermine traditional oversight. Signature Bank’s auditors failed to grasp the risks and repeatedly assured the public, year after year, that everything was fine. But opacity is not a fault of crypto, it is its business model.
Now, the crypto industry has spent millions lobbying Congress and the Trump administration to forget the past and let them take over banking and write their own investment rules. Crypto is encouraging American consumers to abandon traditional bank accounts and turn to “digital dollars” called stablecoins. The industry is even trying to replace savings accounts by offering “yields” in tokens, the crypto equivalent of interest. While this new form of digital currency may seem attractive, stablecoins lack basic security measures that would protect depositors at Silicon Valley Bank when it fails in 2023.
The collapse of Silicon Valley Bank and the turmoil that followed should have been a lesson: Keep crypto out of our financial system. The collapse of Silicon Valley Bank was not the fault of a few bad managers or the reckless reporting of a single auditor. The relaxed controls these banks have received over the years make clear the basic principle of finance: Recklessness is greater when profits are private and losses are public.
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Even now, crypto markets are in turmoil. Since the GENIUS Act went into effect last summer, half a dozen major stablecoins have been ‘pinned’, severing their connection to the currency they claim to have a 1:1 relationship with, and hundreds of millions of dollars have been wiped from anyone holding the tokens. But this is just a small start. The current market for stablecoins is approximately $300 billion. Coinbase’s CEO recently predicted that this figure could quadruple by 2030. Considering the implications of the crypto surge for regional banks in 2023 following the collapse of FTX, what threats could this pose when millions of Americans’ life savings and more banks depend on crypto?
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My investigation revealed that Signature Bank’s auditors were joking with each other as the bank collapsed. They thought his administration was stupid because they were relying on crypto to boost their numbers and “look cool… and they wondered why they were disbanding while the base was falling.” This casual skepticism reflects the deeper failure exposed by the 2023 bank collapse: When crypto-focused exposure is profitable, those tasked with overseeing it will look away.
As the Senate Banking Committee prepares to draft a crypto market structure bill, Congress should remember that the collapse of Silicon Valley Bank was not an accident, it was a preview. This failure revealed how crypto-linked deposits, digitally fast banking and opaque markets can overwhelm regulators before risks become visible. But the legislation now under consideration will push more of this volatility deeper into the financial system under the guise of innovation and clarity. If lawmakers fail to confront the lessons of 2023, they will be locked into the same weaknesses that forced taxpayers to step in before and will inevitably be asked to do so again.
