On The Brink with Castle Island - Mike Lempres on Silvergate's Collapse, Bank Regulation, and Debanking (EP.593)

Episode Date: February 5, 2025

Former Chairman of Silvergate Bank Mike Lempres joins us for a discussion of Silvergate, the crypto-focused bank that was forced into liquidation in early 2023 following a bank run. This are the first on the record comments from any Silvergate executive following the voluntary liquidation announced in March 2023. In this episode: Mike's background at the DoJ, at Coinbase, and how he came to be chairman of the board at Silvergate How Silvergate grew to become the premier crypto-focused bank with $14b in deposits Why the Silvergate Exchange Network (SEN) was so useful to the crypto space How Silvergate suffered a bank run and ultimate liquidation following the FTX collapse How Silvergate survived a 70% bank run Regulatory shifts in 2023 What led the decision to voluntarily liquidate What has happened at Silvergate since the announcement of the liquidation? The effect of Elizabeth Warren's letters and short seller behavior on the collapse Could Silvergate have survived and thrived? Should bank regulators be allowed to ringfence entire industries? Silvergate's relationship with Alameda/FTX - and could they have detected the fraud? Was Silvergate a victim of FTX How the Signature case adds to the suspicion - were regulators sending a message? What was the issue with SEN monitoring? Silvergate's settlements with the Fed, the SEC, and the CA DFP How Silvergate was rugpulled by the government with regards to Diem The Fed's recent evolution on the topic of banks serving crypto Mike's outlook on crypto banking and the domestic crypto industry Why Signature and Silvergate executives are limited in what they can say publicly The problem with "confidential supervisory information" Why we may not get a "smoking gun memo" from the regulators on Choke Point 2.0 What changes would Mike make to bank regulation in the US? Lingering misconceptions about Silvergate Do Silvergate shareholders have a legal case against the government? Further reading: Nic Carter in Piratewires, Operation Choke Point 2.0 Is Underway, And Crypto Is In Its Crosshairs  Nic Carter in Piratewires, Did The Government Start A Global Financial Crisis In An Attempt To Destroy Crypto? Nic Carter in Piratewires,  Inside the Biden Admin's Plot to Destroy Silvergate and Debank Crypto for Good 

So I'm sitting here with Mike Lumpuris, who was the chairman of Silvergate, deeply involved in that bank and very knowledgeable in terms of the situation. This is very, I'm very excited to have Mike, first of all. So thank you for joining us. Really appreciate it. Thank you. You got a great show. It's great to be part of it. And today's a very auspicious and exciting day, at least the day on which we're publishing this episode.

The Senate is having a hearing on. on debanking and tomorrow the house is going to be having a hearing on Operation Chokepoint 2.0. So, you know, it's all happening in Washington. We're going to get to the bottom of this. But, you know, I'm so glad you agreed to come on. I think it's time to tell the story from Silver Gates and from your perspective and no one's done it yet, you know, so couldn't be more excited to have you on this podcast. It's something we talked about a lot, but there's no substitute from, you know, hearing it from you directly.

So so happy with us today. That's great. And there's lots of reasons people haven't been talking about it, but I think the time is right to begin to talk about it. So I think maybe before we start, why don't you just tell us about yourself? You've had a very interesting career all across, you know, many different areas of life. Law, banking, tech, crypto as well. So briefly recap for us how you came to be chairman of Silvergate. Sure.

Well, I see myself as a lawyer at heart. with a broader background than perhaps most lawyers have. But for me, it started, you know, I started essentially as almost a regulator. I worked at, got a White House fellowship after a little bit after law school and worked in the Department of Justice. Thoroughly enjoyed that experience and learned a ton from it, got a lot of respect for the people who work in government. Then went out and practiced law, became general counsel of a stock exchange, the old Pacific Coast

stock exchange, and went back in the government to come and assisted in the United States turning and then rolled back out to become a lawyer at Silvergate Bank. And it was a Silvergate Bank where I first sort of discovered crypto. It was very early in the crypto experience. Silvergate didn't even know it had crypto clients. We ultimately found out that we had some. And the question came up sort of can we as a bank? I'm sorry, Silicon Valley Bank.

I hope I didn't say Silvergate. Silicon Valley Bank. you know, can we as a bank, regulated financial institution, can we bank these guys? So I looked into that issue. That became my issue to deal with. And as you often hear, I went down the rabbit hole and loved it. Ultimately, it turned out that the bank's Silicon Valley Bank made a risk-based decision that it wasn't appropriate for them to get too deeply involved. I made a risk-based decision that it was very appropriate for me to get more involved. And so I left to go I joined a company called Bitnet, which was an early Bitcoin payments company.

We sold that to Racketon, and then I moved over to Coinbase, or I became one of the early lawyers on that team and helped guide Coinbase through its hypergrowth period. And that was a pretty big crash course in dealing with regulators from that side of things, and been doing that ever since, essentially. was an executive in residence at A16 Z crypto and have been sitting on boards of defy crypto with some fintech companies primarily offering expertise in the regulatory regimes that are out there and the best way to respond to them. It was at, I should have mentioned, I apologize, and I was at BITNet early on, I crossed paths with Silvergate Bank.

it had just begun to get into crypto it was about 2014 or so and I think Bitnet was one of the my first five customers Silvergate had so I began to know them as a customer and then as years went on the team there asked me to join the board which I did in 2019

I'm not sure the exact date there and ultimately became chair before going through this most recent experience with them Wow what an incredible background so you've seen it from both besides, you know, being inside of the DOJ and being involved in Coinbase. Obviously, Coinbase had interesting banking issues really in their history. And Andreessen, I think, intervened, I think is the story.

And that's one of the reasons they were able to survive and thrive. Yeah, it's really incredible that banks were able to pick winners and losers in the space by who they chose to bank and didn't bank. And I'd love to say there's some great science to it, but I don't think there was. I mean, I think it was much more haphazard than that. Yeah, I mean, you know, we're going to talk about debanking and, you know, I started complaining about that loudly in early 23, but bank access has been a huge problem in this industry for years. And it's really a matter of if you had it, then you were able to survive. And if you didn't, you know, that's it was just one of those unfortunate things about the crypto space. So Silvergate, when did Silvergate start to explicitly focus on supporting the crypto sector? So around 2013 is when they did that. But, but, but. Prior to that, Silvergate was a, you know, a small Southern California commercial real estate, primarily financial institution, a bank like many others. It never really grew at any significant size.

And then at 2013, they began to lean in on the crypto industry. Identified that as an, you know, a legal industry that wasn't adequately banked. And the demand was very strong. And so they leaned in and said, we want to do that. it in the right way. Now the Silvergate Exchange Network, that was one of the things that I think turbocharged Silvergate's growth. Did that begin in 2017? Do I have that right? 2016, I believe. You got to just about right. Yeah. And so for those that aren't familiar, this was an intrabank settlement network. So if you were a client of Silvergate,

you could use Sen to settle up in real time 24-7, right? That's exactly right. And this grew to be a very important piece of financial infrastructure for the crypto industry. Yeah, it did. And the reason for that is that Silvergate itself was banking so many customers that what the Silvergate Exchange Network enabled Silvergate customers to do was settle 24-7 with other Silvergate customers. And, you know, and that, as you know, it's quite clunky if you're trying to use ACH transfers or wires or something to pay somebody. And so it was much closer to instantaneous and it was a huge benefit to people in the crypto industry. So in let's say we'll start the story in late 2022. When the FTCS collapse occurred, what portion of Silver Gates business was crypto in terms of depository base?

It was not literally 100%, but it was very close. I would say 98%. Yeah. And so even more than signature as a share. Oh, yes. Signature was at a larger financial footprint outside of crypto. Absolutely. So the FJX collapse occurs in November 2022. Silvergate suffers outflows. Will you just sort of recap for us what happened all the way through to March 23? Sure. So Soligate grew, as we mentioned, started in 2013 looking in crypto. So it took a long time for Silvergate to get a billion dollars in deposits.

Then fairly quickly it began to grow. And by November 2022, Silvergate was in around $14 billion in deposits. So a lot of growth very successfully, I think, handled. Then there was during the FTX sort of fraud and debacle that followed it, there was a run on Silvergate bank, as there were in other institutions, by the way, at that time. So, so it went from $14 billion down to about $4 billion in deposits in, I want to say two months. And Solvergate was able to handle that, by the way. We were able to give depositors all their money back. Which is kind of on, that's sort of unheard of for a bank.

It's absolutely. There's a reason, by the way, that it was, Silvergate was able to do that. And that's because Silvergate realized early on that we were in a volatile industry, right? And so we were not a traditional fractional reserve bank that would loan out, you know, 90% of its deposits. All of Silvergate's deposits, essentially all of Silvergate's deposits were being held in U.S. dollars or U.S. dollar equivalents like treasury bills. And that was because we knew there may be, you know, huge swings into a deposit base. And so Silvergate was, I think, uniquely positioned to survive something like that. did survive it, which is pretty incredible. We, we, I'm trying to exist, November, so we paid everything off and we'd be, in January

of 2023, Silvergate was positioned to, to begin to grow back, right? We were, okay, we're ready, we found the floor, we're set, let's go build, and we all know in the crypto industry that there are ebbs and flows. And so we thought this is, you know, quite an ebb, but we can build ourselves back into the next cycle whenever it comes, we'll be ready. And then our regulators stepped in and essentially made that impossible. And we can talk about that, but it was done in both a, there was a couple of public statements that were made by regulators, joint statements about banks' concentrations in the crypto industry indicating that was a concern,

safety and soundness issue. when we became aware of that, we tried to figure out a way forward. Like, what's the best way for us to deal with this? There have been, I think, published reports that regulators were insisting that banks not be concentrated more than about 15% of their business with companies that do crypto business. And to be clear, if I haven't done this, haven't said this, Silvergate was dealing in U.S. dollars. Silvergate was not dealing in Ether, Bitcoin, or anything else. It was dealing in U.S. dollars. There's one small exception where there were, I think, one or maybe two loans that were

secured, over-secured by Bitcoin. But other than that, everything they did was U.S. dollars. So as mentioned, there were published reports saying they couldn't go more than 15% focused on or doing business with crypto companies. If that were the case, of course, Silvergate couldn't continue its business model. Because you're going from 98% to 15%. overnight so what do you do you can't just magically find the way percentages work you can't shrink yourself to 15% that's impossible if you're at nearly 100% right so you'd have to grow or sell yourself

but you know there are probably some other options and and the board had a lot of a lot of big decisions to make and took this stuff very seriously fiduciaries for for investors representative of customers, employees, and explored any other way we could think of to create a new business model that would meet the regulatory needs. Unfortunately, at the same time, you mentioned signature earlier. The backdrop to all this was signature was not permitted to sell its crypto-related deposits or its CigNet, which is sort of the sound equivalent the signature had. And what that meant was, at Silvergate, it was very, very difficult, if not impossible, to sell our crypto-related deposits to any financial institution because they knew the regulators wouldn't accept it.

So ultimately, we decided to wind down the bank, just to voluntarily liquidate the bank, which we did, and we thought that was the most prudent thing to do to protect everybody and to get, you know, to find a path forward for investors, you know, our shareholders, our customers and everyone. Unfortunately, in that process, the net result was that nearly 1,700 customers were in effect debanked because Silvergate was shutting down. And, you know, my personal opinion is that that was the intent of the regulatory demands

that were made. So I want to get into these specific events in a minute, but what has happened at Silvergate since then? I mean, it's actually still, it's being restructured, is the long and short of it. Yeah, so there are a lot of things that happened. But the first thing, okay, we stopped accepting deposits pretty quickly in March, made the decision in March, stopped accepting new deposits in March of 23.

I'm sorry, by November of 23, we had returned all the deposits. So everybody got their money back, just to be clear, there were no, you know, the FDIC didn't need to step in. There was no deposit insurance implications. Silvergate was able to pay everybody, all the depositors back, all their funds. And then when we no longer had any deposits, we wanted to return our bank. charter so that we could no longer be a bank since we are not operating as a bank. That process is a complex one that took a long time. Through that process to find a path forward, we had to

reach settlements with all the various regulators. We did reach those settlements. We then continue to unwind the institution. We filed for bankruptcy. We're now sitting at a bankruptcy court in Delaware and that you know future decisions will be made or confirmed by the bankruptcy court so we'll come back to that later but I want to look at the collapse so you know there's a lot of factors that you could look at and say okay that was the factor because if you look at a voluntary liquidation of a bank basically never happens I looked into it there's not a lot of examples certainly not of a good sized bank okay so I think that in of itself if I may editorialize here. I think that's very suspicious, right? It implies some sort of exogenous force there.

So there's almost never a voluntary liquidation. So then the question is what drove that? And you're telling me you had short-dated maturity assets backing the deposits. So you were able to handle the outflows, you know, unlike a bank that suffers a classic bank run where they can't meet liquidity or solvency crisis. That wasn't really the case here. So, you know, with a lot of the other banks during this crisis, they had longer. dated assets, Fed raises rates, value those assets declines. You know, they have a kind of like a classic issue. Then there's obviously, you know, what's been reported like in the day one, bankruptcy filing, the CAO, Elaine Hedrick echoing what you've just said, she said the increased

supervisory pressure on Silvergate for Silvergate to a point where it would have to need, have needed to remake its business model away from its focus on crypto asset businesses, seek to selling itself as going concern and the shadow of regulatory overhang. That was a more recent filing that came out. There is the fact that Elizabeth Warren had written some very nasty letters about to Silvergate leadership. There was a short-seller campaign. So, I mean, is it just the totality of these factors that were ultimately responsible for the wind down? How do you sort of like rank them?

No, I wouldn't say it was there. totality of fact. I think it's actually pretty simple. And there were, you know, short sellers and there were, you mentioned Senator Warner and Warren, took activity that was either exploited by or coordinated with the short sellers, which was harmful. But really, the issue for us was as simple as we had a business model. It had been in place for 10 plus years at that point. And our regulators said,

That business model is, we can't allow that to continue. That business model is not acceptable to us. And so then we as a bank had to figure out a way to pivot away from that to a new business model. We couldn't identify one. Just couldn't identify one that would get a good result for our shareholders and our employees. So we had to just shut down. We thought that was the right thing to do. And you're right, by the way, voluntary liquidation is extremely rare to the point where our primary

regulator was in our charter was out of California. I don't think they'd ever seen it before. They didn't really know how to handle it. And so that was something we all had to work through together. So Elaine Hatrick's day one filing, you agree with hair characterization there that I just quoted. Yes, I do. So is it fair to say that it had not been for the regulatory shift, Silvergate could have post-bank run post-FTC crisis resumed operations and been a functional bank today. Yeah, I think more than functional. I think it could have been a successful, compliant, well-run, much larger institution. I mean, given the nature of crypto and the recent run-up, we've had as an industry and the fact that the industry is maturing and growing, I think Silvergate,

it was an, it was a, you know, indispensable. I thought part of that ecosystem, and it would be bigger than ever, in my view. So, a devil's advocate here, you know, a lot of critics tell me, I'd obviously written about debanking stuff, which I'm sure you're familiar with it. They say, well, you know, crypto is a risky industry. Should banks even be allowed to bank it? Shouldn't it be ring-fenced from the traditional financial system? What's your view on that? Like, how would you respond to that?

I'd say, yes, crypto is a risky industry by traditional banking standards. And what that means is banks should be thoughtful about how they approach it. And regulators should be thoughtful about it. It's a legal industry that's changing the nature of finance and will be changing the nature of other industries in the future. It's a critical industry, I think, for the future of the American economy. I think it needs access to the banking system. If it doesn't, by the way, it won't be in the United States. It'll just go elsewhere.

And the risks we're talking about are risks that can be handled. I mean, as I mentioned, Silvergate survived a very large run in the world. bank by traditional standards and did it just because it recognized we're in a volatile industry. There are some special things about crypto. Now, there's still a very successful business model to be maintained while being careful and prudent. So, yeah, to me, yes, there are risks that are unique to crypto and there are ways to deal with them.

And it's not even that tough, to be honest with you. So it's a, because, you know, I always hear from regulators, well, you know, okay, maybe banks can serve crypto. It should only be a de minimis part of their business. Crypto is too volatile. Balance sheets expand and contract, and we don't want banks dealing with that. But you're telling me, Silvergate had found the resolution of that, which is hold short-dated maturity assets or cash, cash equivalence.

So you can deal with those outflows, when and if they occur. Yes. And not only that, it was stress tested in real life and it survived. Yeah. So, yeah, that's my opinion on it anyway. I'm very comfortable that banks should be supporting that into the industry. And that if banks don't, I think there's collateral consequences for the U.S. economy and competitiveness and everything else. So one thing I have to address, and when I started looking into Silvergate, a lot of people told me, well, you know, actually you shouldn't be sympathetic to them because they banked Alameda or entities associated with them.

So of course, we have to address this. Silvergate did serve some of the entities that were in the Alameda slash FTX apparatus. what was the what's kind of Silvergate's version of that story yeah we did we did bank alameda first and then FTX and a couple of identities a significant part of our you know business there they're substantial customers for Silvergate the story is pretty simple we've got a lawsuit against them we were victims and I'd argue double and in some ways triple victims of of a fraud that was perpetrated I mean we we asked questions received answers that made sense that were just completely dishonest.

I would also note that it's not just silver-gating claims that we were defrauded by F-TX, but it's the Department of Justice as recognized. And in fact, in the San Bainment-free trial, we were identified as one of the larger victims of his actions. Yeah, and I mean, this was one of the refrains I heard from the short-sellers or after FDX collapse was, you know, Silvergate aided and about it. I mean, it's just the opposite. You guys were a victim. And that is...

We absolutely were a victim. When I mentioned a double or triple victim, we were a victim to the FTCX actions in the sense that they were a customer and they, you know, we lost funds there. The second way we were a victim was that there was run in the bank. That was directly linked to that. You know, it affected the whole ecosystem, but it was very much a run on Silvergate. And then the third way we were a victim to this, I think, was the regulators,

actions. I don't know what drove the regulator's actions towards Silvergate, but they followed shortly after FTX. And I think it makes sense that there was a reaction to the FTCS, the matter and the ultimate result was to close Silvergate, not to allow them to move forward. So financial loss, reputational loss, change in regulatory outlook. I mean, it doesn't get worse than that. Now, in terms of like, you know, basically no one saw the FDX fraud coming. you know, we'd received the FDX pitch back in the day. We passed on it because we just didn't think Sam was very credible, believe it or not. But with benefit of hindsight, do you think the fraud could have been detectable from looking at the flows between the entities that banked with you?

Yeah, I'm sure. At the benefit of hindsight, you could identify things. Everybody, everybody could. I'll tell you that there are a couple things. Banks do have obligations. There's a lot of other customers. Absolutely no doubt about it. But there's an awful lot that banks never know about what their customers are doing.

And it's impossible to know about what all of your customers are up to at all times. I think that as technology gets better, we are as an industry, the banking industry, getting better and better at catching fraudulent activity and other things. I think given the state of the industry at that time, it would have been probably not impossible, but extremely difficult to identify those in advance. Yeah. And it is an interesting feature of the bank system. The banks are expected to be cops. You know, they're deputized.

And they're meant to be doing this non-bank activity, which is being cops for their clients. And it's just there's only so much you can figure out. Now, I want to talk about signature as well. You brought them up. Barney Frank did speak out after they were sent it to receivership and sold off. He said they were basically killed because their association with crypto. As you said, their crypto deposits were not included in the sale to NYCB, the Cignaut product,

which was also a very popular settlement product that was not sold. I mean, this is all pretty suspicious, right? You know, at the 11th hour, Barney Frank claims their solvent, they're sent into receivership. We don't know what's going on there with NYDFS. Then the crypto part of the business is stripped out and not included in the sale. This view is equally as suspicious as I do, presumably. Absolutely. I mean, I think it's very clear that the regular are sending a message to the broader financial

system telling banks that this is not something we want you involved in. I don't think signature is even given the opportunity to try to raise funds there. I think that they were taking over very quickly. And the crypto assets, it's strange to me at the FDIC who's got a mandate to maximize their return, chose not to sell assets that had real

value. But that's sending a message. So I want to look at Sen as well here, Silvergate Exchange Network. So at the time there was Sun and Signate, you know, the value of those networks was because you had a ton of clients. They were all onboarded with you. And they wanted to settle with each other. Market making firms, trading firms, exchanges, stable coins. Settle at all times. Very useful. It's one of the things I regret still, frankly, about this whole situation is loss of Sun. Now, in the case in the ultimate settlement with California financial regulator and I think echoed by the Fed, you know, the CAFP found that Silvergate had, quote, deficiencies with respect to Silvergate's monitoring of internal transactions. Can you sort of elucidate what happened there? Yeah. In the first place, let me get back to those settlements.

What there are there is allegations and just to be to be clear as part of that settlement. Silvergate, neither admits nor denies the accuracy of those allegations. But the upshot is there was, the allegations were that not all internal transfers were sufficiently monitored, electronically monitored in real time. The Silvergate's response to that was severalfold, one of which is that there's no legal obligation to monitor internal transfers, and they were being monitored. to the best of our technology at that time, they were being monitored manually and with investigative work until we were able to get systems up in place that we were monitoring them real time. And that, in fact, I believe Silvergate was the only, maybe signature was, but Silvergate was the only bank in the country that was actually monitoring internal transfers in real time.

And that, you know, so that's what it was. But because of the SEN network, we had a large number of transactions. that were staying again within the bank, but we're rotating around between customers in the bank. And to be really clear, I think everyone agrees that that's, meaning that agencies and everyone else, that when any payments left Silvergate and went outside to another institution or another customer, they were properly monitored at all times. So the issue was limited to allegations about the internal transfers. Yeah, I mean, I think that's something that many people did not understand.

about Sun is that every Sun transaction was happening between a client that's already known to Silvergate. Yeah, and had already been through the entire, you know, KYC and onboarding process at Silvergate, which was at that time and to this day, I think, was recognized as among, if not the most stringent in the industry. So I also want to acknowledge the settlements with the Fed, the SEC and the CADFP. I know you're limited in what you can say about them, but it's sort of long and short of what the resolution was there? Yeah, I mean, the resolution was, again, as a board, we made a decision to shut down the bank, and at that point, we had to move forward.

And so the only way we could see to move forward in any kind of reasonable time frame involved reaching a settlement. And we thought that was the prudent thing to do, the financially responsible thing to do, and the right thing to do is fiduciaries for our shareholders and everyone else. And now it's a shame, by the way, because what gets lost in all this and the shutdown is, you know, 500 employees lost their jobs. And 17, I don't know how many jobs were lost by the 1,700 clients of Silvergate. But there were a lot of jobs lost and a lot of people harmed. And in my view, it was unnecessary.

I sit on the other side of the table, right? I represent the startups that are trying to be banked. And this is why I got so interested in the issue is because our startups were debanked. So from my perspective, capital formation, startup growth was significantly impaired by the loss of Silvergate and the general loss of banking. Yeah. No, I agree with that. Were you surprised at all that Silvergate's primary regulators plus the SEC, the securities regulator, came for Silvergate after the liquidation, the announcement of the liquidation of the bank? Yeah, the whole thing was surprising to me.

I will say that I felt very naive about the way I had lived my life up until a couple of years ago when the regulators came after us because it felt the entire process felt very political and very divorced from reality. And, you know, unfortunately, there's a lot of examples I wish I could go into were not permitted to. But it just felt like the whole thing was political and that they were not. in my view, they were not serving the American people well or the people of California well in the way it was approached. So speaking of not serving the American people well, I want to talk about DM. No one ever talks about DM here. So I briefly had a footnote about DM in my last article because it's just its whole other

story. And then after, you know, after Coinbase started making progress in their foias against the FDIC, and then I had, you know, David Marcus talking about DM saying, you know, they were rug-pulled. And that was such a long saga. But Silvergate's involvement was, I believe SilverGope was meant to be involved in the Libra consortium. And then Silvergate ultimately bought the DM assets. And then that IP was just basically shuttered. It became worthless.

Will you tell me from your perspective what happened with DM? Yeah. I enjoy reading David Marcus's stuff. And David's exactly accurate from my standpoint and how it was handled up to the point he ended. is involvement. Where Silvergate came in is, and I will say, it goes back to, and maybe you can do this as another rubble, but it goes back to January 2021 that the president, President Biden had a working group that looked at stable coins and stable coin issuance. And among the things they did is this presidential working group on financial markets that was called, they said stable coins

should be issued by a financial, I'm sorry, by an insured depository institution. And Silvergate, who had been, at that point, we've been in the space for a long time. We felt like we were sophisticated in the space. We felt we were uniquely positioned as perhaps the only insured depository institution that really understood the space. And so we're familiar with Libra and DM. And so ultimately, Silvergate purchased the DM. assets, intending to move forward and to start issuing a stable coin through that technology.

Unfortunately, what we found is that the regulators, again, changed their posture on that. We were never able to get it approved. And it ultimately became an asset of the bankrupt estate, which is what it is right now. So Silvergate got the impression from the Biden administration at the time. that Silvergate would be a suitable home for the DM assets. Yes. And then that was just radically altered, I mean, especially in 2023, when the Fed said they didn't want banks to touch stable coins.

I think that's exactly, that's exactly right. Now, by the way, I'll mention the Fed has now swapped positions pretty dramatically, right? I mean, it's been interesting to me. The Federal Reserve Bank was a major regulator of, of, of, Silicate Bank. We went through this adventure with the Federal Reserve. And then I see, you know, Chairman Powell of the Fed making statements, and I think as most recent statements said, you know, we're not against innovation. And we don't want to take any actions that would lead to debanking. In my view, that's a very significant pivot from where they were in their dealings with us.

Yeah. I mean, even from the public statements, you know, in Jan, the Fed, the FDIC and the OCC had the joint statement. They said crypto is the rest of the safety and soundest of banks. Then I think in August of 23, the Fed comes out and says, look, banks can do stable coins, but you need a permission slip from us. Basically implies you can't do stable coins. You had Sab 121. If you're a bank, you can't really hold crypto assets on behalf of customers, basically.

I mean, the whole posture was maximum hostile. And it's remarkable that Jay Powell is changing his tune. I mean, just a few weeks in the administration. I'm going to say it's thankful that he is. You know, and I'm not going to appreciate the fact that he's willing to move forward, hopefully. And he said nice words. I mean, they've said words before. But I think this time there's more to it.

I think this time there will be some change coming. I think the Fed will be more responsive, more receptive to innovation in the space. So, you know, speaking of changes in Washington, obviously we've hearings in the House and the around debanking one specifically referencing Operation Shookpoint 2.0, which is what we in crypto call the whole saga. It's not, story doesn't just end there. You know, the new interim chair at the FDIC has said he's going to look into it. Trump himself said he would end Operation Shogpoint. David Sack said he would end it. You know, so it's, you know, market tonal shift in Washington. I think we will get information. How optimistic are you that the hearings or

maybe congressional investigations will surface more information about what happened here in terms of the regulatory shift. I'm very optimistic they'll service more information about it. And I think there will be some changes, which I think is great. I think unfortunately all the changes that we're going to see deal with, we're fighting fights that we never needed to fight in the first place from my perspective. There are some real issues that the crypto industry needs to figure out the right way to address. I mean, from my perspective, BSA, AML issues are significant. We need to figure that out

exactly how are we going to make that work. Sanctions, we got to make sure that we're on top of. There's a lot of real issues. This debanking one is a political issue that was created and didn't need to happen. In the hearings, if you look at the witnesses, there aren't a lot of bankers, actually. So there's, you know, Nathan McCauley at Anchorage, they have a charter. I'm not, there's one banker from Old Glory Bank, which I don't know much about, actually, but you're not hearing from signature. You're not hearing from Silvergate. Why is that? Are there prohibitions on executives of these organizations sharing their story? You're starting to say that there's no prohibition against him appearing before Congress,

but there's absolutely restrictions on what we can say and can't say. And I've talked to just during this conversation we've had, there's been a couple times that I would like to talk about that. You have to stay away from what's known as confidential supervisory information. And it's actually a violation of criminal law to disclose confidential supervisory information that you receive from your regulators. That is normally intended to be a shield for banks so that they can receive candid information to the regulators, not have to share it with the world. But in this case, I think it's being used the other way.

I think it's being used to shield the regulators because anybody who has testified I would have to be concerned about the possibility that they'd violate the law inadvertently. So that's a big part of it. I'd say another big part of it is, you know, many people are still facing lawsuits and other things that they don't want to create exposure for, or they're continuing in the industry. And if you're continuing in the industry, you for sure don't want to tick off your regulators. So I suspect that's what's going on. And that's the thing that struck me about this is there's such a lack of a paper trail.

There's so few people that are willing to go on the record. I mean, I'm incredibly grateful that you chose to speak with me today. I know it takes a lot of bravery to do that, given everything you've been through. But frankly, the continued threat of settlements, enforcements, et cetera. I mean, the CSI doctrine makes it hard to speak. The threat of lawsuits, regulatory harassment makes it hard to speak. And I'm just hopeful that maybe congressional investigations will reveal the thought process at the regulators. But I guess that's to be determined still.

Yeah, I hope that comes. One of the things that I'd like to make sure people understand is that you're extremely unlikely to see a smoking gun memo sent from a regulator to a bank. That's just not the way bank regulation works. Bank regulators have such plenary authority over the banks they're regulating that just if they merely ask a question, it's enough to cause most banks to debank someone, right? If they're just, you know, a side eye glance is almost all it takes. And it's a shame because this stuff should be done in a more transparent way.

But from the banker's standpoint, you're not going to risk your whole institution for one customer. And if the customer is causing any concern at all for your regulator, the odds are high, you're going to drop that customer. So I have a wish list of changes I would like to bank regulation. Not that I am an authority on it at all, but I have been spending a lot of time on it over the last two years. Almost to the day, actually, is when I first published my first article. And I have things that I want. But if you were in charge of reforming bank regulation, what changes would you make to the way it works? Yeah, you know, it's interesting.

I think the biggest, my biggest takeaway from all this was simply we were getting away from the way it's supposed to work. Like, that was the biggest problem we had is that we were not people, from my perspective, the regulators were getting involved in political issues or there were political calls. being made in Washington, D.C., they were being communicated down to the regulators. So they were actually not, from my perspective, using their best regulatory judgment and acting in a good faith way to fulfill their mission. They were instead being directed to do certain things. So I don't think the issue is primarily a legislative one. I think the issue was more congressional oversight, which I'm glad they're doing it, a change in administration, which I'm glad there's been some accountability. And I think, by the way, the crypto industry actually,

did instill some accountability by, you know, getting involved in elections, both in the presidential and Senate and other areas. But I don't have any specific legislative changes I would make. You made a reference to the fact that a lot of the enforcement work, the police enforcement work of the government has been offloaded to financial institutions. That is absolutely true, but I don't think that's likely to change. And that's where a lot of this, you know, a lot of this issue is. That would be a legislative change, but I don't think it's one that can get through. Yeah, as long as the Bank Secrecy Act is in place, that's not going to change. Now, in terms of the Trump administration's ability to tackle this, it's been a stated priority. I'm very excited

to see both houses looking into it. Your level of optimism around basically getting to bottom this or resolving it is fairly high. Is that fair to say? Yes. Yeah, I think the administration is taking aggressive good steps in this area. I think Congress is looking into it. You know, it's very difficult to get to the bottom of regulatory matters. People are pretty good at covering their behind, and they probably did so there. One thing I'll mention is if you're looking forward, we're talking about regulatory actions in the future. I am confident the federal government is going to focus on what, you know, real issues in this space. And I think, I know people in the industry should know that they can't get away with, you know, acting like there's no regulations.

There's going to be a lot of regulatory enforcement. You've got to be careful about everything you do. And I mentioned BSA, you know, terrorist financing, sanctions, all kinds of stuff that we need to be very careful about. But I think the big change coming in the future is not going to be coming from the federal government. I think states are going to be stepping up in this space. And I think the industry needs to be aware of that because for better or worse, right now,

crypto has become a political player and identified as a political player. And I think what that means is that there will be states where attorneys general and governors and others, regulators, will seek to make political points by going after the crypto industry. And they do have the authority. There's a lot of consumer protection. There's a lot of state blue sky security laws. There's other ways states will be involved. So, you know, I don't think that the change in government.

in DC is some kind of panacea for the industry where it's all going to be, you know, roses, but I do think it's better. It's absolutely going to be better. It's making a huge, I think it's going to be a big change. And I think it's going to enable U.S. companies to get back to doing what they should be doing, which is building good companies, providing good services. So I think it's taken a couple of worries off the table and maybe he's added one or two others. To my understanding, this is one of the first time you've spoken on the record since the dissolution of Silvergate, if you wanted to set the record straight on something that we haven't covered today, you know, what is, what's kind of a misconception about the bank that you want to resolve?

It frustrates me that people think that somehow Silvergate was in some ways in cahoots with FTX or anybody else and was a bad actor in this. I am 100,000 percent convinced that Silvergate was not a malicious or bad actor. And that's a message that's got to get out. I'm also extremely frustrated by the fact that short sellers sometimes working with congressional and Senate office holders are able to just say outrageously false statements with no with complete impunity. And we need to figure out a way of this. You ask for a regularity or legal change. I would love to see short sellers face some liability for making malicious and false statements. It's kind of a reverse pump and dump because they're trying to make money by driving

the stock of prices down. That I would love to see. But that'd be the biggest thing. I mean, Other than that, I think people should know that from my perspective, Silvergate was a bank that tried to do it right. And I think did do it right, not perfectly, but did do it right. And was, in my view, killed unnecessarily by regulators. And there's a different world where that didn't need to happen. And it makes me sad that, you know, that institution is gone. And as I mentioned, the employees are gone. The investors lost their money or a big chunk of their money.

and all the customers are out scrambling still looking for banks, many of them. Yeah, and I actually forgot to ask this, but like in terms of the future for common or even preferred shareholders, is there a case against the government? Is there a regulatory takings case? I've heard this idea about it around. Is there any kind of prospect of recovery beyond the assets that exist in the bank? All that's in the bankruptcy court right now. There isn't, I mean, any lawsuits is an asset of the bankruptcy, you know, the estate. and it will not be my decision how to pursue that.

A U.S. trustee or a bankruptcy court will be approving any action like that. So I don't know whether it's going to go forward, but to the extent there's a claim it belongs to the estate. In terms of your next steps, I mean, we haven't talked about that all. You know, what's your plan? I'm excited about this industry. I'm excited about, you know, the sort of little niche role I've managed to carve out in it, which is to help companies deal with regulation and help financial, you know, help banks deal with it.

I don't know what my next step. I'm active now. I'm on, you know, I'm fully busy. My plate is full right now. I don't see any particular change coming. But I'm excited by what the next few years are going to bring. And I think some of the companies that I'm working with are going to be quite large and quite successful.

And it's a ton of fun. I also think, by the way, that somebody else is going to recreate Silvergate Bank. It's going to happen. And it's a shame it's not going to be Silvergate, but that somebody else is going to be offering those same services to this industry and it's going to be very successful at it. And assuming that they're careful, and I'm sure they will be,

and the regulators are prudent, we'll end up with a safe, secure financial institution that's offering all these services. And I'm hopeful that Silvergate's 1700 customers and all the other customers out there are able to get bank accounts, get back into the economic system of the United States. Well, I mean, despite the ordeal that you and your colleagues went through, like I'm very heartened to see that you are still optimistic about the industry.

I don't know if I would be, but it's really great to see. It wasn't the industry. I don't feel like that, you know, that anything that went wrong at silvergate was not the crypto industry. I mean, you know, obviously FTX would be better if that hadn't happened. But, you know, the strengths in the industry so far outweigh any week. And I think, you know, the issue that Silvergate had was, was honestly a change in policy with the regulators that, you know, in my view was done in the dark in a back room somewhere without proper public discussion. And, you know, that's now been corrected. The new president was elected in part on that. And so I'm very optimistic, actually, where this is going. Well, Mike, I can't express my gratitude enough. Thank you so much for coming on and sharing your story with us. And it's been such a pleasure to have you on. Great. Thank you. I thank you. I should have said early for the report you done in the space. It's been, I think, spot on from my perspective and very helpful.

Well, here's two things getting better.