Unchained - Did Washington Crush Crypto’s Most Important Bank? Its Former Chairman Says Yes. - Ep. 780

Episode Date: February 7, 2025

 Sign up for our free regulatory newsletter! Silvergate Bank was once crypto’s most important banking partner, handling billions in deposits from the biggest players in the industry. Then, FTX collapsed—and everything changed. In this episode of Unchained, Mike Lempres, former chairman of Silvergate, talks about how Silvergate grew into a banking giant for crypto, why Washington suddenly turned against them—even after they survived the FTX crisis, and whether Operation Choke Point 2.0 was real. Plus, did short sellers and politicians work together to tank Silvergate’s stock? And what does the future look like for banks that want to serve crypto? This is part of the inside story of one of the biggest banking collapses in crypto history. Show highlights: 2:08 How Mike’s background in banking led him to work in crypto 4:10 Why banking has always been a challenge for crypto companies 5:14 How Silvergate Bank got involved so much with the industry and how it achieved “tremendous growth” 8:10 The “magic” of the Silvergate Exchange Network (SEN) 14:19 Why Mike believes Silvergate’s problem was not banking regulators, but D.C. politics 17:49 How everything changed after the FTX collapse 24:45 Whether SEN is a valuable asset for a bank to have 28:39 Why Mike believes that Operation Choke Point 2.0 is real 30:48 Whether short sellers worked with politicians to tank Silvergate 34:21 How Mike thinks that banks could service the crypto industry Visit our website for breaking news, analysis, op-eds, articles to learn about crypto, and much more: unchainedcrypto.com Thank you to our sponsors! RockWallet Somnia Network Quai Network Mantle Guest Mike Lempres, Former Chairman of Silvergate Bank Links Unchained:  Why the new FDIC Leadership Isn’t Convinced Operation Chokepoint 2.0 Exists Regulators Are Limiting Banks Serving Crypto Clients. Does That Violate the Law? Rep. French Hill Says He’d Investigate Operation Choke Point 2.0 as Financial Services Chair Are Regulatory Failures to Blame for Crypto Banking Issues? Caitlin Long on Why Operation Choke Point 2.0 Has Bankers Nervous Ahead of Debanking Hearings, Industry Is Divided on Political Strategy Caitlin Long on Why the Fed’s Rejections of Custodia Bank Seem Politically Motivated How Will the FTX Collapse Affect Silvergate? A Bear and a Bull Debate Learn more about your ad choices. Visit megaphone.fm/adchoices

Do you feel like everything that you experienced, like you would say that that is part of Operation Shope 2.0? Like, do you think it's real? Yes, I do. And it's interesting, I didn't think that originally, but as more and more time passes, I've seen, it was clearly a coordinated matter coming out of Washington, D.C. that had certainly the effect of keeping crypto out of the banking system. Hi, everyone. Welcome to Unchained. You're no-hype resource. for all things crypto. I'm your host, Laura Shin. We are now featuring quotes from listeners on the show. Today we have two comments on X responding to polychain capitals, Olaf Carlson Wee, who recently

said on unchained, quote, every post should have a token. In response, Volk wrote, this does not need to exist. Remember the Dorsey tweet, don't bring back hype in crypto, build real value. Meanwhile, Travis Bickle commented, Olaf undefeated. If you want your comment featured, write a review of the podcast overall or leave a comment on our video on YouTube or X. This is the February 7th, 2025 episode of Unchained. Rockwallet is a secure digital wallet that's quick, easy, and built with a safety-first mindset. Visit rockwallet.com slash welcome slash unchained for an exclusive offer for Unchained listeners. Mantle is building the future of OnChane Finance.

Experience its enhanced index fund, Mantle Banking, and MantleX. Visit group.mantle.xyz to learn more. Somnia processes over 400,000 transactions per second with sub-second finality, powering scalable, mass consumer apps, and reactive features fully on-chain. Learn more at somnia.network. Kwai Network, the first decentralized energy dollar with unprecedented scalability. By reinventing proof of work, Quai enables next generation defy and global commerce. Learn more at Q.AI.

Today's guest is Mike Limpress, former chairman of Silvergate Bank. Welcome, Mike. Oh, thanks for. It's great to be here. You have quite the history in crypto and banking. Can you tell the audience about your various experiences in both industries? It is quite, I'm pretty old, so I've been done quite a lot, actually. But my start in crypto comes from my start in banking, actually.

So my background of a lawyer by training a number of years to the Department of Justice at very high levels and was in big law for a while that didn't really suit me. Went in-house, which I found did suit me, ended up at Silicon Valley Bank when Bitcoin was just getting at start. And not surprisingly, Silicon Valley Bank had some Bitcoin-related customer. It wasn't even crypto at that point. It was just Bitcoin. It was just the one asset. The issue for the bank became, you know, can we touch this?

Can we bank this? Can we support this industry? And so my job as the lawyer there was to figure that out. And ultimately, what I discovered is the bank and I had different levels of risk tolerance. I loved the industry. I thought I was very excited about it. The bank was properly much more circumspect about getting involved. And ultimately, I left the bank to join one of the bank's customers, a company called Bitnet, which was an early Bitcoin Payments company. And then from there, Bidnet, we ended up selling it to Racketon. It turns out in 2014, Bitcoin was not a great payment solution quite yet. And ultimately, I made my way over to Coinbase, where I became among the first lawyers and the first chief legal officer and senior lawyer at Coinbase

and rode the wave there through their hypergrowth period and had been involved in it ever since. Yeah, and you also worked at A16C crypto. Yeah, I went A16C crypto from Coinbase and had a great experience there. and through there got in touch with a lot of really the leading, you know, emerging companies in DFI in particular at that time and began a practice where I had been consulting for growth company, growing companies in sort of the DFI and crypto space. I had been doing that ever since. So the industry has long talked about issues with banking. And so I was curious when you were working at Coinbase and a 16c crypto, what issues did you notice that

crypto companies had with banking. Oh, it's been a long-standing problem for crypto companies. And it's understandable. And the issue from the very beginning has been uncertainty from regulators. So banks have been very reluctant to get involved. Initially, the industry was so small, there was no incentive for banks to get involved. And, you know, they weren't going to make any money doing it. They were going to have some real risk.

So it was a challenge. It was a challenge getting bank accounts. And the one issue that came up repeatedly is companies kept kind of, not disclosing to their banks that they were involved in crypto, and they would get an account with any, any bank chase or whoever it was, and they just wouldn't disclose that they were in crypto, and ultimately, they would then get debanked, and you can't really blame the bank because the bank felt a little misled. Now, there were, however, a couple of banks that got more forward-leaning, and one of those is Silvergate.

And how is it that Silvergate became so focused on crypto? Yeah, it's an interesting story. It happened before I got involved with Silvergate. So sorry, it was sort of a sleepy, I'll use that term, a sleepy Southern California and commercial real estate financial institution. And there are many of those, right? And had an ambitious management team that wanted to get some things done was having difficulty getting traction in that commercial real estate market in Southern California. So began in 1996 and didn't really have any huge growth until 2013.

Obviously, went through the 2008 crisis. But in 2013, the manager team and board recognized an opportunity in crypto and saw that it was an underserved market, saw that it was a growing part of the economy and wanted to get ahead of things. It began to lean forward and aggressively develop the kind of compliance programs or analysis that needed to operate in that space and then move forward and did a terrific job. So from 2013, it began to grow materially. It grew fast. And in fact, the big thing that got it going was about 2016 or so. There was enough critical mass at Silvergate to create this thing called the Silvergrade Exchange Network, which was an opportunity for Silvergate customers, and only Silvergate customers.

It was an internal to the bank solution for payments. but it enabled 24-7 settlement between Silvergate customers almost instantaneously. And that was a major improvement over the other alternatives that were out there. So that further increased the demand in the industry to work with Silvergate. And Silvergate grew, again, tremendously, up to the point where in 2022, it was north of $14 billion in assets and was a really growing, successful company. And what were the types of payments that crypto companies were using SEN for? Well, anything, and they're selling out with each other.

So it was anything it was. But a lot of it involved exchanges, right? So people were acquiring one digital asset or another. And you might have a hedge fund that's acquiring a large number of assets or just trading repeatedly throughout the day. And this enabled them to just settle that out. Oh, okay. Yeah.

Somebody once said to me, oh, it was exchanges paying each other? And I was like, that doesn't sound right to me. That actually does happen. Because for liquidity purposes, exchanges will often, you know, some trades will be executed at another exchange just because particularly in those days, the markets just weren't that deep, right? The individual markets just weren't that deep. They're now much, much, much deeper. As you know, I was at Coinbase, Coinbase is far bigger and far more sophisticated than it was in 2016. game. Yeah, I remember, yeah, early on, they were sourcing Bitcoins on other exchanges for purchases. So something that I've also been so curious about about Sen is how did it work? I don't

think I've ever figured out whether or not it was actually a blockchain-based network. Yeah, it was not. Okay. The magic of the Sen was simply the network. It was simply the fact that everybody was in there. The technology was nothing. And in fact, that became an issue later as we're looking at, Josh, what is this asset and is there some value to it? But the technology was really pretty simple. It was essentially a bookkeeping operation that's going on in the back of a bank. The magic was the network.

The fact that everybody else in the ecosystem was involved in it. So if you wanted to trade with anybody in the ecosystem, you could do it that way. Oh, okay. So, yeah, when we get to the sale of Silvergate, all. have to ask you more about that. By the way, I'm sorry to interrupt, but signature bank had an equivalent mechanism called CigNet. And my understanding is exactly the same.

It was a network. The advantage came from the network. It did not come from technology in any way, shape, or form. Okay. Okay. These are mysteries that I'm now clearing up for myself. Hopefully it's also helpful for the listener. So Silvergate Bank, obviously, was one of the banks that experienced this massive

drawdown after the collapse of FTCX. I think I heard you say it was 14 billion to 2 billion in two months. And obviously, a fractional reserve bank would not be able to handle something like that or likely would not be able to. How was Silvergate Bank able to do that? Yeah, I think it was a 14 billion to just under four, I believe, quickly. Okay. We say two months. And I say, I cite that figure two months as well. It's only because that we were reporting in that way. I think it might have happened even faster than that. But we were able to handle it. And there's no way a fractional reserve bank, a traditional bank, could handle it.

I mean, that, you know, the Bailey home loan of It's a Wonderful Life was lending out the deposits that came in to homeowners, right? That is the business model that most banks have. They hold 10 to 15% of their assets, you know, and they loan out the rest. That obviously can't work in the crypto space. So the reason we were able to survive it at Silvergate is simply, that we knew that was lightly. We knew it was a possibility and we'd planned on it for a long time. It's a very volatile space. There was a business model where you could make a nice return

without taking risk by lending things out. So we never took the risk of lending funds out to any material degree. The VASFITR, almost all of what we had was kept in in cash or cash equivalence, treasuries that were relatively short term. And so that was the, that was the reason we were able to survive it. And so was that the way Silvergate Bank made money? Because obviously, a typical bank would do it by lending out the money. Yeah. Now, we made money through, you know, through fees. And we were holding, if you're holding $14 billion, even with relatively short-term treasuries, you're getting a return on that. So, you know, it's, you can make a nice return without taking too much risk in that area, without taking risk, that risk at all, actually.

Okay, so basically they just had a different business model from most banks. Yes. Yeah, and we were uniquely positioned, I think, in that way. And that's why I believe the Wall Street Journal looked at it, and I think we survived the largest bank running, new banks that ever survived, or at least the records they were able to find. Because when you lose 70% of your deposits in short order, you have, if you're not fully liquid, there's no way you're going to survive that.

Wow. Okay, so in a moment, we'll then talk about the decision to liquidate Silvergate Bank, but first a quick word from the sponsors who make this show possible. What makes Rock Wallet different from other crypto wallets? It's built with the security of your assets as the number one priority. Rock Wallet is SOC2 compliant, FinC Sen registered, uses two-factor authentication, and the tools just keep getting better, with more upgrades coming in 2025. Right now, Rock Wallet is offering $75 in LTC for unchained listeners to give

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and Mantle X for AI-driven innovation. Experience the future of finance with Mantle and follow Mantle on X to stay tuned. We have another listener comment responding to our episode with Rushi Manche and Ola Carlson-Wee. On why EVML2s aren't keeping up, Richard Pasquin said on X, quote,

Salana is just able to scale in transaction volume and adoption hasn't slowed it down. The average Salana user has substantially more transactions than the average EVM user. Again, if you want to hear your comment featured on the show, please write a review or leave a comment on an episode on YouTube or X. Back to my conversation with Mike. What were your conversations like with regulators during the period after FTX's collapse? Yeah, let me pull back a little bit because I'm not able to actually answer that question. I wish I could. There is a provision of banking law that's intended to protect banks that deals with what's called confidential supervisory information. And any information gets for your supervisors are required to be kept confidential. It's actually a criminal violation to disclose it. So it puts you in a difficult situation. By the way, there's a very good reason for that. And the good reason is you don't want to have banks. who are given information to the regular about a particular weakness that came up or some

issue that came up, spreading that word in the public, which would then create a run on that particular bank over an issue that's actually a solvable issue that comes up all the time. So it's intended to protect banks and to enable candid conversations between supervisors and banks. I think it's an important part of the banking system. In this case, however, we're in a very different situation. And we actually would like to be able to discuss these issues, but we're still bound by the same restrictions and laws, and I'm not able to. I will tell you, there were many, many conversations, and I have a great deal of respect, particularly some of the local regulators who I thought were very, very good at what they did.

The issue that came up for Silvergate was not really an issue of banking regulators in terms of the guys who were at the bank every day working with us. It was much more a policy concern that came out of D.C. So in my view, it was a political problem, not really a really, regulatory problem. Well, can you at least just characterize what their concerns were? Yes, and I can do that by pointing to a couple of things. There were some public documents that came out relating to the concentration of banks in the crypto industry. And there were two big reports that came out in in 2023 by a joint working group of bank regulators, each of which indicated that the, the

express real concerns about banks being too concentrated, having too much of their business in the crypto industry. Now, from the standpoint of Silvergate, and by the way, that's only one tiny piece of the communications you have with your regulators. They cover everything, right? They're looking at everything a bank does. They are essentially living at the bank, not literally, but they have offices there, and they're there quite a lot as the bank grows. And they look at everything. They look at everything. In this case, the regulators had been working with Silvergate for 10 years. And so the issue of concentration was an odd one because our very business model, certainly by about 2018 or so, was concentrated. We were the crypto industry, and that's what we did.

Our deposits came almost exclusively from crypto-related companies. And to be clear, Laura, I know you know this, I'm not sure that everyone in the audience would, but we dealt with U.S. dollars. We didn't deal with crypto. What we provided often was really just traditional kind of boring banking services for companies that happened to be involved in crypto. So if they were doing their payroll, for example, it's just traditional payroll, people getting paid for U.S. dollars for the day they worked.

And so that was a very normal banking activity that would come through us. It just happened to involve with crypto. And your deposits, I believe, were 98% from the crypto. industry, right? That ink does accurate, yes. So essentially your bank had grown up under the watch of these local regulators who watched you grow to almost entirely concentrate on the crypto industry and had okayed it. And then after FTX, it seemed to you that they were having to deliver instructions from

elsewhere. Is that what I'm piecing together? Yeah, that's very accurate. That's very accurate. And it's been reported publicly that regulators communicated to banks that the level of concentration that was acceptable for the crypto industry was on the order of 15%, 1,5%. So 15% of your business could come from crypto. Now, I can't confirm that we had those kind of communications, but if we had, you see the

position that would put the bank in, a bank that's 100% in crypto, can't get to 15% by shrinking. It just is impossible, right? that's the way percentages work. So it would dramatically change the future course of the bank. And in the case of Silvergate, what happened is Silvergate considered all the options that would be available to itself to meet the banking regulators' demands and wasn't able to come up with a future path forward. We didn't see that we could grow that we could 10x ourselves quickly.

And that's, if you go back to 1996 to 2016, we had a 20-year period with, relatively little growth, and we didn't see any competitive advantage to us suddenly, you know, going back to the traditional banking world and 10xing our business. And the options of selling Silvergate was also essentially eliminated when banking regulators did not approve the sale of signatures, crypto-related assets. Now, signature, I believe, was about a $43-ish billion-dollar-sized bank, and it was seized. I think they were treated very badly by regulators. but they were closed by the FDIC, and the FDIC's mission and mandate is to maximize their, you know,

assets, the resources you can get back so that depositors are fully repaid and the insurance fund is protected. But even with that mandate, they did not allow the sale of signatures, I guess $4 billion or so worth of deposit signature had at that time, and CigNet was not allowed to be sold. So in that environment, there was nobody in no bank who was looking to buy Silvergate's assets. Yeah. By the way, that 15% cap that was reported, that was, I think, our publication that did some digging around that.

And it doesn't appear to have been, at least, you know, our reporter was not able to find something where it was like an explicit policy. I think that one of the complaints I have about the way this was handled is there's very little that's actually in a writing that at least went from regulators to banks. There may be a lot, and I think there's some emails coming out now that they're showing that within the FDIC, within the Fed, within the various regulators, there were communications. But as somebody who was regulated, the message was not publicly discussed. It was not a debated thing. There was no public in comment to it. It was handled in a, I'd call it a surreptitious manner. I mean, it came kind of as a surprise, or very much as a surprise to us, and it came

not in a way that could be publicly challenged. And by the way, we were also in the middle of, you know, a whole bunch of other issues that were going on at the bank as we were, as we were closing down banking operations and trying to make sure everything was clean with regulators. And at that point, your options are very limited to push back too hard against the regulator, certainly in public. And so that was the environment we were in as a board and managed to celebrate. Yeah.

With the article we did, we raised the question of whether or not it was an administrative procedures act violation. And there's arguments on both sides. We had experts who said, you know, this does appear to have been an unofficial policy that they didn't write down. and they didn't push it through a public comment, they're just enforcing it without telling everybody it's their policy. And then others were saying, no, like there's discretion given to advice.

And like, yeah, I don't remember all the arguments, but I think one of them also was like it might have just reflected the bank's own, you know, unwillingness to like go beyond a certain amount of risk. So it wasn't totally clear. But we did link together that there were numerous places. that had this kind of 15% number. Yeah, it clearly came, that's why I think it came from Washington, D.C., by the way, is because it seemed to have nationwide impact with a pretty consistent message from what

I can tell. I actually don't care whether it was legal. I mean, it'd be nice if it was legal, it should be legal. But it was not well, it's not good government. It's not good regulation to be worked with a bank for a decade on a daily basis going on, a number of issues. And then, including, by the way, after the FTCX debacle, right? I mean, after FTCS caused a run, as we discussed, a run on the bank of Silvergate, we worked very closely with every regulator on that, survived it, stabilized, got ready to grow again. You know, it still had tremendous

demand we think for our services. We're still operating what we believe to be a, you know, a good, solid, prudently run, safe and sound banking and, you know, bank. And then suddenly to be told that there's this new restriction that sort of has dropped on you, that's not the way regulation is supposed to work. That's just not the way it's supposed to work. And in this case, the net result was the voluntary liquidation of a bank, which led to, you know, shareholders losing money. It led to 500 employees losing their job.

It led to 1,700 customers losing bank accounts. And I don't know how many jobs were lost as a ripple effect of all those companies. And they're all companies. We didn't deal with consumers. So all those companies losing their bank accounts. And by the way, one point to stress is depositors were safe. No depositor ever lost a penny at Silvergate Bank. And we didn't go to the FDIC.

We didn't go to the deposit insurance fund at all. It was all. The money was there. People all got their money back. Yeah. It's kind of like, you know, under a different political atmosphere, you know, Silvergate could have been praised for having survived what is, you know, one of the worst bank runs in history. And instead, you know, you guys were asked to do something that just wasn't really quite feasible. So, you know, I did want to circle back to this question about the value of send because there's been a lot of, you know, sort of.

of speculation about the fact that Silvergate was not allowed to sell Sen as an asset. And this is, this goes back to my technology question, because I guess I had also thought, oh, that does sound like it's a valuable thing. So do you believe that it was a valuable asset or do you believe it only was valuable simply because of that big concentration of crypto companies you had? Well, it's, it's currently an asset of the estate, right? There's a bankruptcy proceeding and Sen is still a thing and it's still an asset. It has not proven to have. value yet when we've gone to sell it. I actually think the value of it came from the network almost exclusively. And then just to be clear, with regard to send, no regulator told us we couldn't

sell send. That wasn't the issue. The issue was the market was so chilled that nobody wanted to buy set. Because I believe the issue with regard to the send is in order for that to be a valuable asset for a bank, a bank has to have a substantial number of crypto. It was all focused on crypto, right? It's a very powerful brand in the crypto industry. So you had to be in the crypto space to really take advantage of send. There was no technology that was so impressive that you could just lift it and apply it to some other industry. People would be wowed and think it was wonderful.

It really was the crypto network. And when we went to sell it, there was no interest from anybody to acquire it. Although, you know, it's still an asset that's still out there ready to be acquired and may have some value someday. My personal opinion is that I came from the network, almost exclusively for the network, and the network is now on the moment. Okay, and I'm sorry, I thought that earlier in the episode, you said that Cigna, signature bank was not allowed to sell Cig.

That's exactly right. And I think Arnie Frank, of all people, was complained about that the actions taken against signature or intended to send a message to chill banking. I figured how you phrase it, basically chill the market about banking crypto. Yeah, he said regulators wanted to send a very strong anti-crypto message. So do you agree? with his assessment there? Yeah, I do.

I do. I know that was certainly the effect of what they did. No doubt that was the effect of what they did. As to the intent, the more I learned, the more I think, yes, that was their intent. And we're learning more just every day now with hearings on the Hill and emails coming out that it looks like, yes,

it was the intent of the administration at that time to chill crypto. So then this goes to the fact that Silvergate was not allowed to sell its non-crypto-related deposits. Do you feel that that came from that like I don't want to call it a lot of policy but you know what I mean that sort of direction that Washington was heading yeah I think and again the issue of Silvergate is

different for signature signature was you know closed and and shuttered and taken over by the FDIC and the FDIC in fact you know sold their assets we voluntarily liquidated we were we did that very intentionally so that we would have some control over the process of among other reasons. So no one was telling us we couldn't sell these things. It was our assets to sell. The challenge was the market was so chilled by the activities that had been, you know, and it wasn't just signature, by the way. There were a lot of messages coming out that you shouldn't bank crypto or shouldn't bank crypto too much. So there was no one who would be acquiring Silvergate's assets. And I understand it from the other bank standpoint. I mean, if you are a larger financial institution,

I'm sorry, pull back, in order to acquire something. Silvergate, with the new rules, apparently, it would have to be no more than 15% of your business. So if Silvergate's $4 or $5 billion at that time was 15% of your business, you're talking about a fairly good-sized bank. And I don't know why a good-sized bank would take a risk at irritating its regulators by doing that. And then there was very, there was no appetite for it. And so I'm sure you're aware the crypto community will call this kind of push from Washington

or somewhere from the banking regulators, Operation Shoke Point 2.0, do you feel like everything that you experienced? You would say that that is part of Operation Shook Point 2.0? Like, do you think it's real? Yes, I do. And it's interesting, I didn't think that originally, but as more and more time passes, I've seen, it was clearly a coordinated matter coming out of Washington, D.C. that had certainly the effect of keeping crypto out of the banking system. And it may have been motivated by concern about, you know, the soundness of the banking system or something. I'm not sure what motivated it, but there clearly was an attempt to keep crypto out of the banking system.

And I've heard more and more stories about individuals who are debanked for various reasons. And that's when profitable customers are being debanked all over the country with different banks. It's coming from somewhere. It's coming from, I think, a central point. And in the case of a surrogate, what we went through clearly led to the debanking of 1,700 customers. and the closing one, I think, was the leading bank in the crypto industry. And what do you think the motivation was for that? I struggle with that. I'm not entirely sure. I think a lot of it had to do with a quick

overreaction, I think, to FTX, which, you know, was a shock to the system. And if your job is to deal with the soundness of the banking system writ large, if you're the Treasury Secretary or the chair of the Federal Reserve or wherever, you know, you don't want to worry about this crazy little industry that seems very risky and has a reputation of being involved in a lot of shady activities. And if it's going to create a threat, an actual systemic threat to the industry, you just want to shut it down. And I think that's what was going on. I mean, I struggle with it because in many ways to me it's similar with what Gary Gensler was doing at the SEC. I'm not really clear why he was, and why in this case the banking regulators were so

set against the industry, but they were. Well, I have heard you also say that you felt that short sellers had a financial incentive to so doubt about the viability of signature, sorry, Silvergate, but also signature, and that they may have worked with politicians or, if not worked with, at least their effects were quite similar to some of the actions of Lewis. I don't think that's what shut us down. I don't think that's why we made it. I know it's not why we made the decision to close.

But it's an exacerbating factor when you're trying to grow a company or trying to deal with the company. And it's clearly a flaw in the system. I mean, there is a break in the system because there were short sellers who were saying things that were just demonstrably false and kind of outrageous. Then there were statements made by politicians that were either exploited by the short sellers or coordinated with the short sellers. And I don't know which it was that led to this huge rise of concern. about Silvergate and other things that were not founded in reality, right? So that we had real issues. I mean, FTX was a real challenge. Our own in the bank was a real challenge. A lot of real challenges we had. But some of the allegations that were made and publicized and pushed were

100% false. And what is most troubling about that from my standpoint is people would push false stories, short the stock, and then profit by pushing the false stories. And there appeared to be no remedy to that. And when you're on the receiving end, particularly when you're in kind of a crisis situation yourself, the publicly traded company has to be incredibly careful about how it responds to anything in public. And so you can't make statements rebutting wild allegations when you've got an SEC that is going to be, all your statements have to be accurate and have to be precise. And you've got these short sellers who are out there making, again, I'm out of outrageously false statements, it's a very frustrating position to be in. And the system's broken

because no one should profit from doing that. They did harm investors directly. And again, I'm going to pull back. In the case of Silvergate, our decision was pretty clear, pretty clean. It was a business model decision. But there was a lot of harm that short sellers inflicted along the way. Yeah. Well, actually, one of them came on the show where he and somebody who took the position that, who was also a former bank executive, actually a former crypto bank executive. They discussed, yeah, it was probably signature and Silvergate. And, you know, obviously the short seller was like, this, you know, these banks are cooked or, you know, I'd remember the language he used.

And the other person who, like I said, had worked, I think it was Cross River, said, no, these are the reasons why I don't think so. And so, yeah, so when you were saying those things, I'm like, might have happened on my show. I heard that podcast. Yeah. I mean, it's true. There were, again, real issues that we were struggling with. But it doesn't help, and particularly if you're dealing with a run in the bank to have short sellers at the same time, saying things that are just outrageous and false.

Like, for example, that Silvergate was actively colluding with FTX and Sam Bankman-Fried to rip people out. is just a false statement that did not happen. And so, you know, when that's being said and repeated and repeated, it's not a good situation to be in, because even when your customers are, you know, nervous. Yeah. Well, so you have obviously all this extensive experience that we discussed. How do you think banks who want to serve the crypto industry should structure their businesses? I'm assuming they'd be doing less fractional banking, but then, you know, would their business model be something different? Like, you know, because the other thing that comes to mind is that their risk is much more

concentrated rather than diversified. So that in itself is like something, you know, that they would have to take an account. So like, what do you think would be a way for the banking system to serve this industry? It's interesting. I think that for a large institution, to bank a significant amount of crypto would actually present some challenges because the risk in the crypto community is so different, right? The risk, by the way, is entirely manageable and it's something that can be handled. It just takes some thought and it takes some investment

and some willingness to take the long-term view and not seek to take shortcuts and make a lot of money real short-term or anything like that. So I think, A, I think that there will be a bank that replicates silver against business model. I think that it'll just happen. There'll be another bank that does that, and it'll be a successful bank. And, you know, the key is to take your compliance obligations incredibly seriously.

I mean, one of the things that we talked about briefly, I guess, but in the crypto ecosystem, there are issues of, you know, know your customer, know your business, know the transaction, watch out for, you know, potential money laundering. You've got to be on top of, of sanctions. There's stuff you really have to be on top of and you have to be on top of it,

primarily through technology in a way that exceeds what most banks need to do with technology because things happen so quickly by the nature of the crypto currencies. So you'd have to invest significantly in compliance and then recognize at the same time your returns are going to be a little bit constrained because you've got to have, you've got to protect the depositors, by keeping the funds readily available for return. And now you can still make money. It's a business model that still works and still does well. But you've got to have those funds right.

You don't know. And now, as we saw in the spring of what we're about it, 23, when Silicon Valley Bank and signature and First Republic had problems, runs can happen very quickly. And you'd have to be prepared to meet your customer's demands by having their funds available to them. But the business model works. It does work. And there's tremendous demand. And I'm just talking about the U.S., obviously, which has been this whole conversation. The rest of the world, people are banking in the rest of the world, you know, and it's thus far worked out. I think the U.S. is behind because we took ourselves out for four years or so. And now we've got to get back in. We've got to catch up to the rest of the world in a responsible, regulated way. I mean, we've got our Regulators can be very good. And we have a number of banks that almost every bank wants to be a good actor. You know, they want to do it right. So we just need to make sure that we all agree with what the rules are, that we're thoughtful about what they are and that were transparent about what those expectations are. In the case of Silvergate, what happened is those, the rules weren't transparent and they changed with no notice suddenly. And that's what trapped Silvergate and led to the decision to voluntarily liquidate.

All right. Well, Mike, this has been such a great conversation. Thank you so much for coming on on Chained. Oh, thank you. I enjoy the podcast. Why, congratulations. You bring a lot of value to this space. Thank you. Don't forget, next up is the weekly news recap today presented by Wondercraft AI. Stick around for this week in crypto after this short break. Behold Kauai Network, born of proof of work, a layer one to end the system's Merck. With energy and currency entwined, the first energy dollar is designed. Decentralized, it stands both stable, strong. To scale commerce the globe sought so long. Unstoppable, it fuels the defy dream, where global trade and power cross the stream.

Kauai carves paths for monetary change, a platform where these forces rearrange. Sustainability and money blend. Discover how at QU.a.i transcends. Welcome to this week's Crypto Roundup. In today's recap, we cover Ethereum's wild ride as it plunged 20% on Trump's tariff news before bouncing back. Meanwhile, Ethereum's supply has surged back to pre-merge levels, raising concerns about its deflationary status. Over in the policy world, a report alleges Trump-backed World Liberty Financial offered token swap deals, though some projects deny involvement. XRP Ledger suffered a 64-minute outage, sparking debate over its consensus model.

Plus, the Trump administration is exploring a U.S. Bitcoin Reserve, while the SEC scales back its crypto-enforcement unit. FTX's Bahamas unit prepares to repay creditors, Coinbase users are losing millions to scams, and Micro Strategy has rebranded to Strategy to double down on Bitcoin. And finally, the SEC's former crypto enforcer has been reassigned to IT support. Thanks for tuning in to the weekly news recap. Let's begin. Etherium plunges 27% on Trump tariffs, then recovers. Ethereum experienced its biggest intraday drop since 2021, plunging 27% on Monday. As a wave of selling hit the crypto market, following U.S. President Donald Trump's announcement of new tariffs on Canada, Mexico and China. Bitcoin also dropped 60 to around $93,000, while the global crypto market saw 400,000,000. billion wiped out in a single day.

Liquidations across major exchanges totaled 2.27 billion with Ethereum alone, accounting for 616 million in forced sell-offs. The sell-off was the largest single-day liquidation event in the history of crypto. However, the market rebounded sharply on Tuesday after Trump agreed to pause the tariffs for 30 days following discussions with Canadian Prime Minister Justin Trudeau and Mexican President Claudia Sheenbaum. Bitcoin surged back above 100. $102,500, while Ethereum recovered 18% to an intraday high of 2,909 times.

Despite the relief rally, tensions remain as China responded with retaliatory tariffs, and European leaders brace for further trade actions from the US, signaling continued market volatility ahead. Ethereum's supply returns to pre-merge levels. Ethereum's token supply has climbed back to levels last seen before the merge and two, raising concerns about the network's deflationary market. model. According to data from ultrasound dot money, Ethereum's total supply now stands at 120.5 million eth. This shift marks a reversal from the deflationary trend Ethereum had maintained since

transitioning to proof of stake. And analysts point to last year's Denkun upgrade as a primary factor behind the change. The Denkoan upgrade, implemented in March 2024, introduced blob transactions, a mechanism designed to enhance Ethereum's scalability by efficiently handling large data payloads, particularly for layer two solutions. However, this upgrade also altered how transaction fees are burned. Ethereum researcher Justin Drake acknowledged that supply has been growing at 0.5% per year, driven by 1% yearly issuance minus 0.5% in burns. Still, he remains optimistic that Ethereum will regain its deflationary status, stating, to become ultrasound again, either issuance has to decrease or the burn has to increase.

I believe both will happen. If Ethereum's supply continues to expand without sufficient fee burns, it could weaken its position as a store of value, a key factor in the ultrasound money narrative that has differentiated ether from the tokens of most other smart contract blockchains. Meanwhile, Ethereum validators have been signaling support for an increase in the network's gas limit, with the threshold recently surpassing 34 million gas units

for the first time since 21. The gas limit determines the maximum amount of computational work that can be included in a block, and increasing it allows for more transactions per block, reducing congestion and lowering fees. Report alleges Trump-backed crypto platform offered token swap deals. A new report from Blockworks claims that World Liberty Financial, the crypto project backed by President Trump and his family, has been offering blockchain teams token swap deals as a way to build its treasury. According to sources cited in the report, World Liberty Financial representatives have approached crypto projects with a proposal.

If they buy at least $10 million worth of WLFI tokens, the platform will purchase an equal amount of the project's native token. Additionally, the report states that priority treatment was promised to projects willing to commit at least $15 million. World Liberty Financial, which is expected to launch later this year with a $1.5 billion fully diluted valuation, has already sold 24 billion tokens at 5 cents each, totaling an estimated $1.2 billion, according to its website. The platform aims to help users interact with decentralized finance applications, but currently only offers the option to purchase its token. Despite the report, crypto projects linked to WLFI's treasury have denied any formal token swap agreement. Tron, whose TRX token is among WLFI's largest holdings, rejected the claim, with a spokesperson telling CoinDesk, there is no token swap agreement.

Similarly, Movement Labs, whose MoveT token is also held in WLFI's treasury, said its inclusion resulted from market purchases rather than any prearranged deal. Movement Labs co-founder Rushi Manchi emphasized, there weren't any deals, any backdoor deals, it was purely just market buying, XRP Ledger suffers hour-long halt. The XRP Ledger experienced a 64-minute outage late Tuesday, re-igniting debate over the strengths and weaknesses of its consensus mechanism. The network paused transaction processing as validators failed to reach agreement, a feature designed to prevent double spending and inconsistencies. Supporters argued the halt was an expected safety measure,

with Daniel Keller, chief technology officer of blockchain infrastructure firm eminence, telling the block that pausing until a solution is found is one of the trade-offs. However, critics pointed to the small number of trusted validators as a possible weakness, noting other blockchain networks such as Ethereum and Bitcoin rely on much larger validator sets. Ripple's chief technology officer David Schwartz assured users that no funds were lost, explaining that while validator operators attempted to resolve the issue, the network may have spontaneously recovered on its own as only a few unique node-list validators actually made any changes. Trump administration weighs national Bitcoin reserve.

President Trump has tasked his administration's crypto and AI SAR, David Sacks, with evaluating the feasibility of a U.S. strategic Bitcoin reserve. Speaking at a press conference in Washington, Sachs confirmed that assessing such a reserve is one of the administration's first priorities, though the working group assigned to digital assets is still awaiting final cabinet confirmations. We're still waiting for some of those cabinet secretaries, but that's one of the first things we're going to look at. Sachs said. The move comes as some U.S. states, including Utah, advance legislation to establish state-level Bitcoin reserves, positioning digital assets as part of broader financial strategies. While some analysts speculate that Bitcoin could be included in Trump's

newly announced sovereign wealth fund, Sachs clarified that the fund is a separate initiative. with Commerce Secretary nominee Howard Lutnik handling that effort. SEC reduces crypto enforcement unit. The U.S. Securities and Exchange Commission is downsizing its crypto enforcement unit, reassigning dozens of lawyers previously focused on digital asset cases, according to multiple reports. The move comes as part of President Trump's push to scale back regulatory oversight in the crypto industry. The SEC's crypto enforcement unit, which expanded under former chair Gary Gensler,

is now seeing many of its 50 members reassigned, with some lawyers reportedly calling the shift an unfair demotion. Meanwhile, acting SEC Chair Mark Wieda has established a new internal task force to review the agency's crypto policies. SEC Commissioner Hester Purse, a long-time crypto advocate, will lead the new initiative. It took us a long time to get into this mess, and it is going to take us some time to get out of it, said Perce, emphasizing the need for a clearer regulatory framework. The task force's first goal is to determine where crypto assets fall under securities laws. FDX's Bahamas unit to begin, creditor repayments. FtX digital markets, the Bahamian arm of the collapsed crypto exchange, will begin repaying its first group of creditors on February

18th, marking a significant step in the long-running bankruptcy process. According to a distribution notice, creditors with claims of $50,000 or less, categorized as convenience class creditors, will receive full reimbursement of their adjudicated claims, along with 9% annual interest dating back to November 2022. The repayment process is being facilitated by BitGo, though it remains unclear if Cracken, another exchange assisting in FTX's payout process, will follow the same schedule. PWC, the appointed liquidator for FTX digital markets, has stated that creditors with larger claims will receive payments in the second quarter of this year. Coinbase users lose $300 million annually to scams, says Zach XBT?

Crypto-investigator Zach XBT has revealed that Coinbase users collectively lose over 300 million each year to social engineering scams, with $65 million, lost between December and January alone. The scams allegedly typically involve fraudsters impersonating Coinbase support, using spoofed phone numbers and stolen personal data to gain victims' trust before convincing them to transfer funds to fraudulent wallets. For the vast majority of the time, these theft addresses are not being reported at all by Coinbase in popular compliance tools. Even after the thefts went on for weeks, Zach XBT wrote, noting that other major exchanges do not have the same issue.

The investigator also outlined several security improvements Coinbase could implement, including making phone number inputs optional, creating restricted account types for new users and enhancing scam prevention education. Micro Strategy rebrands to strategy. MicroStrategy has officially rebranded as strategy, reflecting its stronger commitment to Bitcoin as the company's core business. The name change, announced Wednesday, is described as a natural evolution, emphasizing its position as the largest corporate holder of Bitcoin.

The rebrand comes with a new logo featuring Bitcoin's iconic B and a shift in branding colors to orange, further cementing its crypto-first identity. Alongside the rebranding, strategy reported its fourth consecutive quarterly loss, largely due to a $1.1 billion impairment charge on its Bitcoin holdings. The company acquired 218,18,000 BTC in the last quarter, bringing its total to 471,107 BTC, valued at approximately $46 billion as of February 6. Time for Funbib! Jorge Tenreiro, the SEC's former deputy chief of crypto enforcement, has reportedly been reassigned to the agency's IT department, proving once and for all that career paths can be nonlinear, or just completely random. After years of chasing down Ripple, Coinbase, and every token

with a suspicious logo, Tenrero may now be chasing down forgotten passwords and rebooting rotors. Reports indicate he's already working on his biggest case yet, the mystery of the office Wi-Fi that never works. And that's all. Thanks so much for you. for joining us today. If you enjoyed this recap, go to UnchainedCrypto.behave.com. That is unchainedcropto.behyve.com and sign up for our free newsletter so that you can stay up to date with the latest in crypto. Unchained is produced by Laura Shin with help from Juan Aranovich, Matt Pilchard, Megan Gavis, Pam Majumdar, and Margaret Curia. The weekly recap was written by Juan Aranavich and edited by Kari McMahon. Thanks for listening.