Thread by @CaitlinLong_

1/ I'VE BEEN THINKING abt #crypto & banking, which is in the news these days (& I'm living it too). I've spent yrs thinking abt the issues. Yes it *IS* possible for trad banks to safely bank #crytpo industry: simply back demand deposits 100% w/ cash held in a Fed master acct.💡

2/ But that's NOT what the US banks banking #crypto generally are doing. Pls see for yourselves by reviewing their financial statements--you'll see, eg, >10yr securities backing demand deposits that customers cld withdraw in minutes🤦‍♀️. That's a prob but isn't inherent to #crypto!

3/ I just finished updating a balance sheet analysis of the banks that bank #crypto & something jumped out at me--8x, which is a number I've seen before. When any bank puts 8x its shareholders' equity at risk in anything & that thing goes haywire, the outcome is predictable.🔮💡

4/ I've seen the 8x # many times before: eg, in 2001 John Mack asked me to cut to chase on something & I replied: "Company A invested 8x its shareholders' equity in the stock market & when the stock market corrected 12% the company went bust." Sometimes simplicity is clarifying💡

5/ You can do the math yourselves for the banks--simply compare demand deposits that cld be withdrawn in minutes vs cash on hand & calculate that as % of shareholders' equity. Corporate treasurers regularly do that math for banks where they hold cash, bc most of it is uninsured💡

6/ What conclusions can be drawn?
a) bank runs at banks serving #crypto have nothing to do w/ crypto per se & instead have to do w/ "good ol' fashioned banks borrowing short & lending long." That doesn't work when the bank's demand deposits can be withdrawn within minutes, and...

7/
b) #crypto is a canary in the coal mine for #FedNow, bc 24/7/365 payments will come online this yr--which means demand deposits (outside of crypto) will start settling near-instantly. Curiously tho I haven't seen bank regulators requiring FedNow banks to hold more liquidity🤔

8/ Related, it always bothered me that the President's Working Group wanted only insured depository institutions to issue #stablecoins. That's backwards!😱There's *A LOT of liquidity risk* in stablecoins--depository institutions involved with them should hold only 100% *cash.*💡

9/ All this is why #Wyoming #SPDIs make sense for banking the #crypto industry. SPDIs can't lend & must hold 100% reserves in liquid assets. @custodiabank proposed to hold 108% of its customers' demand deposits in cash in its master account, but was declined. Not over yet tho!💪

10/ Finally, I noticed something interesting when comparing the recent report by FDIC's Inspector General to FTX's bankruptcy filings. The FDIC IG's report said 11 FDIC-insured banks "may have had involvement in alleged wire transfer fraud" involving FTX🧐

https://twitter.com/CaitlinLong_/status/1628404028324323334?s=20

11/ Who might be the 11 banks in the FDIC's IG report? Well, here's the FTX bankruptcy filing list of banks. See if you can spot the 11 banks! Note multiple U.S.-based G-SIBs (global systemically important institutions) might be among them. Let's see how regulators handle this...