Steve and Adam discuss the drama in the banking industry, and the potential impact on Registered Investment Advisers.
Transcript:
0:06Welcome to crypto for planners.
0:09I am Steve Larsen and with me is Adam Bloomberg and today we're going to cover what's going on with the banks and in the economy, Adam, how are you feeling about everything that's going on right now?
0:21And you know, Steve, I am feeling okay considering, you know, kind of teetering on the brink of financial collapse, whatever that is that the economy are you personally that's on the brink of collapse.
0:32The answer to that is, yes, it is.
0:36Actually both, both are kind of teetering right now, but that's okay.
0:40It's where we are and, and you know, you and I are here to chat about it.
0:44Yeah, we are.
0:45So what we're not going to do today is really give you a thorough recap of what happened that's already been done much better by better journalistic outlets than Adam and I talking on a zoom.
0:55However, for those of you that you brought up to speed, there were three major bank failures here in the last several weeks.
1:02They were all coincidentally crypto related for various reasons that we may get into.
1:07And so we really want to cover what's going on.
1:10Obviously, it's spread into some concern over bigger contagion that's going on.
1:15But we really want to talk about what's going on with these three banks and how it might affect advisors, right?
1:23And so well important important note there is the middle bank in their rights Silicon Valley Bank was actually not much of a crypto bank.
1:31It was, it was a tech centered bank, it was created, you know, basically to service those companies that were getting VC funding in, you know, mainly in the Silicon Valley area at first.
1:43But really those those companies that were getting VC funding in the tech arena.
1:47and so they were actually notoriously not a crypto bank.
1:50They did not like banking crypto related companies.
1:53They like banking kind of web two related companies.
1:56Fintech, those kind.
1:58So that the middle of the three banks was really not a crypto related.
2:03And remember the first one wasn't a, wasn't a total failure.
2:06It was a bank that just wound down operations because they said we're not gonna have enough money if we don't wind down now and they gave and that Silver Gate, I'm referring to, they gave everyone their money back.
2:16So again, I know we're not trying to recap everything, but when we see headlines and this, this is how it affects advisors, right?
2:23Your clients see headlines about bank failures and bailouts and everything and that's really not what we're seeing here, we didn't have a full on failure from Silver Gate.
2:33They wound down operations because, and we can go into the fact that they were, they had a, you know, a loan from the Federal Home Loan bank kind of pulled out from under them, but they gave everyone that gave all their deposits, depositors their money back and got rid of operations.
2:52And with Silicon Valley Bank, it was just a run on the bank that didn't really need to be there.
2:57And then with, with signature bank in New York, that one's kind of up in the air.
3:03We still don't know, we, we still don't know they're there.
3:06The fed is calling it a failure and we had to take it over and I'm a little leery of that.
3:11Yeah, it was shut down via press release.
3:13It would appear without much more of a formal process.
3:17Exactly.
3:18Yeah, it's one of those things like if you're a baseball player and you find out you got traded because someone sends you a tweet or something.
3:23It's kind of like that.
3:24Very, very similar.
3:26I, you know, I know that, that I had some thoughts on it over the weekend and I think you may have summed it up in a, in a tweet.
3:32It was something to the effect of, is this the dumbest bank run of all time?
3:38Yep.
3:38That sounds about right.
3:39It was an incredibly dumb, but it was you know, and what you and I, what I kind of intimated to you earlier today and I think I said on Twitter is so many people that, I don't know, there are so many people that I know and, you know, I'm, I'm relatively privileged.
3:55Right.
3:55I have people, you know, all my friends have, have gone to college and their doctors and lawyers and in business and such, they still don't understand how fractional banking works and they don't understand that the inverse relationship between interest rates and bond prices and, and how that works.
4:11So when they start reading headlines and these people are your clients right there.
4:15They're the clients of advisers in plant or how they're, they're clients of advisors.
4:19We talked to their reading these headlines going, oh my gosh, there's a banking crisis and the reality is there's really not a, I don't understand what the crisis is.
4:29Right?
4:30That, that's the trouble.
4:31But, but it's one of those things on as a bank run starts, once it starts, it just keeps going, it's kind of self perpetuating.
4:39hmm.
4:40Is it being a crisis of confidence more than more than anything?
4:43And let's, let's move over to that.
4:45Let's move into how it, it does affect advisors and how a potential change in the macro environment is going to affect, affect practices.
4:53So, for example, yesterday, so we met with my R A, we met with the team on Sunday, we decided to get something out to the clients on Monday just because there's so much bad information and so many scared headlines.
5:07As you know, I'm not a big Twitter person, but I made the mistake of getting on there for, you know, about 20 minutes at night that I thought the world was collapsing and then I remembered why I stay off of their But what, what, what we, what we did.
5:19So we put, we put on a webinar for clients and really the focus was, of course, here's what's going on, but we spent a lot of time going through basically the different types of accounts.
5:28So you mentioned how people don't understand fractional reserve banking.
5:31Well, we, we wanted them to understand what a bank account is, you know, how they don't have all the deposits on hand to cover the clients.
5:39And also the F D I C insurance is tied to that.
5:42What does that mean?
5:43And then over on the brokerage side, that's not for actual reserve.
5:46So they're supposed to be your assets that aren't loaned out or borrowed against or anything else, you know, whether that's the case, that's a different story, but that's at least theoretically how it works.
5:55And then there is civic S I P C insurance on that and how that works.
6:00So that's kind of, that's kind of where we started at our firm.
6:03Yeah, and that's a great place to start for any advisor is to just kind of help your clients understand and then you can, you can move forward from there and once they have a better understanding, then you can move forward and go.
6:15All right, let's, we can talk individually with all of you about where your account sit, what kind of risks there are in those accounts because that's your job as the advisors to, to know about these things and then, and then to help them through it.
6:27So that's a good place to start is not to go, is not to go full on Twitter.
6:32You know, all caps, this has to stop or you have to hate the government or everything's falling.
6:37But let me just explain to you how all these work and then if you need to come talk to us, but which you probably did, if you need to come talk to us about it, you can schedule an appointment and we'll talk about your different accounts, whether they're at banks, whether their brokerage accounts wherever and what they mean, what kind of risks there are, whose money it is officially.
6:59And you know, let's have those discussions.
7:01And as I said, most people don't understand how all that works.
7:04So if you just explain it to it and your job as the advisor is the first, is that first line of education, then that's a good place to start.
7:13Now, now, what if people, you know not?
7:16What if clients started with where I started with, right?
7:18Like there's a run on crypto banks there after the crypto banks.
7:22This is about crypto and it's not about crypto at the same time.
7:25So that gets, that gets a little more confusing as far as the bank fundamentals.
7:29I certainly don't think so, but as far as the crypto banks being targeted.
7:32Yes.
7:33So where do you, where do you think crypto as it relates to advisors fits into this scenario here?
7:42So the hard part is, you know, as we've seen it very much seems like the crypto related banks are being targeted by the government, right?
7:51And there's plenty of stuff to read, there's plenty of stuff that is conspiracy theory and some of it that is probably not at all conspiracy theory that is the crypto banks or the crypto industry, I guess is being targeted in one way you target that is you go after the banks that are banking, the actual companies and those companies being exchanges, those companies being, you know, like circle which offers us D C or U S dollar coin, you start targeting those banks and saying you're no longer allowed to exist.
8:19And therefore all your depositors have to get their money back.
8:22And I got to go find another bank and eventually crypto companies run out of banks, run out of places that, that they can hold their money.
8:28So where it affects, where it comes down to affecting clients is you go.
8:33All right.
8:33What is, what do we feel is the U S government's attitude towards crypto.
8:40It's obviously this current administration is negative, is a negative attitude towards crypto.
8:45Where does that affect?
8:48Then where does it affect your investments in crypto?
8:50Prices?
8:50Well, kind of what we saw is, is prices went down for a little while in terms of Bitcoin and Ether and the other crypto assets and then they have taken off the last few days.
9:01Now, whether that's because the tough part to know is, is that because the government quote averted a banking crisis and we're all happy that we're not all losing our money or is it because we're starting to realize the cracks in the banking system and the cracks in the financial system and go, oh, maybe this is the, this is part of the solution and therefore there's going to be more usage of Bitcoin and usage of the theory and it could be a combination.
9:30And it makes you wonder, are we shifting from an attitude where, hey, the government's coming after crypto, crypto is in trouble too.
9:38Hey, the government's coming after crypto crypto super important, you know, because really they know they're not just coming after crypto, they're coming after your economic freedom and now it's more important and that's certainly the optimistic take, but I think it warrants watching as the government goes harder.
9:54Does, does the adoption increase?
9:56And the price increase because of that.
10:00Right.
10:00Exactly.
10:01And, and we can go that route, which is kind of the conspiracy theory route, which I don't feel is very conspiracy theory anymore.
10:07I think it's pretty, they've made it pretty obvious, but if the route is, I don't like the fact that I'm subject to what, what happens with the banks and therefore I'm subject to what happens with the central bank and the fed.
10:19There's a way to opt out of that.
10:21It doesn't have to be with everything, but with some of your money, there are ways to opt out and the way you opt out is you hold onto your assets and that's exactly what crypto is.
10:29It's, I'm going to take care of my own assets so it could be, I'm worried that the government's gonna have full, you know, purview over everything I do and, and full visibility and everything that, that I spend my money on or it's, I'm not so much as worried about that, but I kind of want to have some of my assets where I have full control over it and that's what the education for clients, right about how fractional reserve banking works and about how your accounts work is.
10:56Once you've handed the money over to the bank, you're kind of not in full control.
11:00And if you want to have this full control, once you understand that you go and they're probably going to go.
11:05Alright, how do I, how do I get control of my assets?
11:07Well, that's kind of what the crypto system is building.
11:10It does have a lot of warts right now.
11:12It's not the easiest user experience, all of those things, which are getting better.
11:16But at least for advisors, you kind of see now why there's a need for it and maybe now is the time to start learning about it and we're gonna, you know, totally self you know, self promotion here.
11:27But this is, that's kind of what we're trying to do here, but this maybe is the time to learn about it because maybe now the system, it makes a little more, more sense.
11:37And even if you weren't behind some of the speculation behind the price of Bitcoin, now you kind of go, oh, I see where the idea of custody my own assets or my clients wanting to custody their own assets.
11:49Kind of makes sense.
11:50This is a system that does that, that's, that's, that's well said, and one of the practical effects, you know, on, on the R A firm was the switching of the banking partners.
12:02So obviously getting money on and off in and out of the accounts, my friends at Gemini Vitria and, and so, you know, they were processing wires through silver gate, you know, and then it, then it changed and then now I think it's jpmorgan or something.
12:16Don't, don't quote me under, they switched to, but, and again, and I know another great great provide in the space for advisors that again, they've been fined through all this.
12:25He's a great custodian, but they've had to redo the banking provider in the on and on off and on a couple of times and it's just been a pain in the butt.
12:32So it wasn't any funds at risk, but certainly operationally and logistically getting money on and off was affected throughout this.
12:40And Adam transition into the last thing we want to talk about, which is what does this mean for defi and self custody that you mentioned.
12:49And I use those to link it because the choke point in both places is the cramping.
12:53It's getting money out of your bank in the crypto.
12:56And that's, that's the first thing it needs to be tackled if we're going to really go any direction.
13:00But specifically in the defi where, where it leaves defi is, it's hard because you're right.
13:07The on and off ramps are the tough part.
13:09We still pay for most of our stuff in dollars.
13:12We still mostly get paid in dollars, whether it's your business, whether you're an employee, whatever you generally get paid in dollars and you at some point, if you want to participate in the defi system, have to convert that into crypto.
13:24So I think it leaves us honestly in some tough points.
13:28coin base is still, you know, kind of the biggest on off ramp here in the US.
13:33And it's gonna be really tough for the government to put a clamp on coin base because they're a publicly traded company because everything is really pretty transparent.
13:42And it's at some point you can't just basically snuff out an entire publicly traded company.
13:48So I think that's, you know, coin base is still there and, and going a little bit further into where it sits with defied the things that coin base released in the last few weeks, right, which is their base, which is their layer two on top of Ethereum.
14:05their wallet is a service, product code, whatever it is, it's coming out, which is basically now, I'm going to have this on ramp on the coin base and then probably more easily transmit, move that into defi on chain as we, as we say it.
14:20I think that's, those are pretty important in the fact that coin base is still there and, and coin bases is moving these things forward, not to be like an advertisement for coin base, but again, being a publicly traded company,, and, and having the relationships they have and having the amount of money they have, they're, they're kind of the, the, I don't know the bellwether right now.
14:40They're, they're kind of what we're all looking for as for as far as the on and off ramps and then you get into defi that's probably the on off ramp.
14:47Eventually, we probably see us more of earning money on chain, meaning I'm going to earn in crypto, I'm going to get paid from my company's wallet to my wallet or my company's, you know, crypto account to my crypto account.
15:00There is probably going to be more of that and more of that, you know, you X is being built and more of these products are being built.
15:06And again, as the advisors, it's gonna be kind of incumbent to understand how all that works.
15:11If my clients getting paid in crypto, I better understand what that means and, and how to take on those risks.
15:17Because honestly, before last week, would you have even thought about the risk, the risks inherent in your bank accounts at federally chartered banks?
15:28No, no, I wouldn't have and I don't think most people were we, you know, and, and part of like I mentioned, the education, different clients was, hey, within your Schwab account here, we can, we can put it at C D s at 10 different banks.
15:40If we need to, we can get it diversified out, we can stand with these limits because even though it's unlikely, it's still, why not?
15:48Like why wouldn't we be more safe than not in doing that?
15:53And you bring up a good point about coin base, they are, they are aligned with us As much as possible with people who want crypto to succeed because they're not a fractional reserve bank and they do segregate assets and they are regulated and they're kind of the best of all worlds and, you know, to somebody like Geminis credit.
16:11So, are they accept?
16:14Right.
16:14They were going out there trying to generate yield from a black box and got in trouble with the product and all that.
16:19But as, but as, as far as, you know, segregating the customer's assets specifically on the institutional side, they do it as well.
16:28but, but that, that's looking more and more attracted by today.
16:30Right.
16:30At least have your assets in an institution where they can't lend them out or chop them up or pull them together.
16:40Exactly.
16:41And as the adviser having to do some of that due diligence, right.
16:45On, not only the custodian, you're, you're using for your clients for crypto, but on who they do business with who their banks are.
16:52Like where, like if you keep going down the line, where are the risks further and further down the line and you might, you know, as the advisor, throw your hands up and go, well, I don't, I just don't want to get in this crypto thing.
17:02I'll just stick to traditional assets.
17:04Well, look, banks got hit right.
17:07Like who, who's to say there's not a run on, you know, some other bank who's to say that there's not more that's being created more that we're going to see in the near future.
17:17You, you know, I think, I don't know if we've mentioned Fidelity.
17:20There's fidelity is a custodian.
17:21Their fidelity is a bank as well.
17:23Right.
17:23So everyone's going to be impacted by what happens next with what the Fed does and what the federal government and central bank do with, with banks because they're all, all of our money is so intertwined.
17:37So it's an important wake up call to go.
17:39All right.
17:40It's time to start doing a little bit of risk management.
17:42A little bit of due diligence, more so than we did in the past where we just said, we totally trust that the government has it under control and go.
17:51All right, we need to find out where the risk points are and going back to the idea of Gemini and Coinbase like, okay, we need to do that, that, that kind of risk assessment and due diligence as advisors, just like you need to on all of your custodians and fidelity.
18:04Fidelity is a great bridge between the two worlds right there, legitimate crypto custodian.
18:10And they're obviously, you know, a top 234 legit traditional custodian for advisors and they're, they're in both worlds for sure.
18:19And there's somebody again that can serve as a great on ramp between the two worlds and they're not doing a whole lot of it now.
18:26And the reason is because of this regulatory uncertainty and the attacks that they see coin based taken that these banks are taken and who knows what's going on behind the scenes.
18:35But at some point, we're going to need these larger companies who understand both worlds to step up to step up and, and fight for crypto hopefully.
18:44Yeah.
18:44And I think they will.
18:46And if we could go back a little bit, I think, and I apologize for continuing to go back.
18:50But when we started this conversation a little bit is what is the, what is the impact on these quote crypto banks or these banks that we're happy to, to bank crypto companies getting shut down and advisers, talking to clients in this feeling of, oh my gosh, the government's trying to shut down crypto.
19:09There's no more banks.
19:10Well, you just mentioned Fidelity is a pretty large traditional finance bank, a pretty large traditional finance custodian and a pretty large crypto custodian and is, is getting bigger every day and delving into that a little bit more.
19:25chase, I mean, as much as Jamie Diamond talks badly about crypto, they still do quite a lot of banking for crypto companies.
19:32And let's not forget, you know, Bank of New York Mellon, which is maybe the largest custodian in the world is, is the, you know, they're the custodian of choice for a lot of huge crypto hedge funds and banks.
19:44And I don't feel like, and I don't, I don't want to make assertions but those companies aren't going down anytime soon.
19:50Those are not banks that are going to fail anytime soon because there be too big to fail banks.
19:55Right.
19:56And they're all full on into crypto.
19:58They're not backing away at all their custody ng assets or custom digital assets, traditional assets.
20:03They're mixed.
20:03So I don't want there to be this feeling of, oh, my gosh, they said they shut down Silver Gate and signature.
20:10It's all done because there are much larger banks than those two that are perfectly happy delving into crypto.
20:18Yeah.
20:19I think my overall take and it's, it's a topic for another podcast but it's not that they're trying to kill kryptos that they're trying to control crypto and these are smaller, more independent banks who maybe don't have the revolving doors of people moving from the board of directors and general counsel through the Treasury department back to the banks, like the bigger ones, where they do have control.
20:39So I would say it's more of a, more of a wanting it under their thumb than a, let's kill it altogether type of attitude coming out of the government.
20:50Yeah.
20:50Yeah, I agree.
20:51You're right.
20:52It's more of a control, how can we control it and kill it and if we need to tamp it down a little bit till we figure out how to get control, that's probably where we are at this point.
21:02but, but again, there's plenty of business to go around, there's plenty of building that's going on in, in the crypto world and we're seeing every day more needs for solutions like this not to totally take over the traditional finance system and, and kick it out of the way.
21:18But you see a little bit here and there as to how I can, I can take on some of that custody and take off, take on some of the things that crypto gives us the transparency, the instant settlement, the the self custody.
21:32Great summary.
21:33So let's go ahead and wrap it up there.
21:35It's enough bank talk that I think anybody should be subjected to at one sitting.
21:38Hopefully there's some value there for you.
21:40Let's end with a pitch.
21:42You're gonna hear from us a couple of times.
21:44The pitches to go to crossroads, crossroads 23 the planet out conference in ST Louis last week of April Monday through Monday.
21:52Tuesday.
21:53Is it 24th, 25th?
21:54I should have had that up or something like that.
21:56Yes, 20 24th and 25th in ST Louis.
21:59Come get your tickets and most importantly, Adam, maybe people understand the speaker lineup we have and that's why they're not buying tickets.
22:07Yeah, I'm not quite sure like it's a pretty killer speaker lineup.
22:09So you and I have talked about banks and clients and regulation and stuff.
22:12So we have Commissioner Hester Purse is leading off our conference.
22:16So we're gonna get to ask an sec commissioner, you know, have her talk about what's happening with compliance and regulations of the SEC, which is pretty important to us as advisors.
22:24And we're gonna get to ask questions among after that, we have Matt Hogan from bit wise, is gonna talk about the state of the market.
22:31We're gonna have a compliance panel with compliance attorneys and compliance officers where again, it's all discussions, you get to ask questions and if you're an advisor that's in the crypto or wants to be in two days, you're gonna get just about everything answered that you want.
22:45We're gonna have Tyrone Ross in the 41 financial crew that's gonna talk about how they're building kind of the R I A or the future using certain tools, some crypto, some not crypto, some web two and, and yeah, kind of new tools that are out there.
22:58So there are so many others.
23:01We're gonna talk about data and research and where you get your information and indexes and, and all of that.
23:06But it is an absolutely killer lineup for any.
23:08It's very focused on advisers wanting to add crypto to their practice.
23:13Yeah.
23:13Hit the planet dot com slash crossroads and you can get the details on time and date hotel and buy your tickets.
23:20We are using N F T s for tickets were trying to get sidetracked, explaining that, but no, you don't have to pay with crypto.
23:26Yes.
23:27Even though we're doing N F T tickets, you can pay with your credit card specifically and hopefully your company's credit card makes it a lot easier on everybody.
23:35All right, Adam, thanks for jumping on the podcast with me.
23:38Hope there is some value there.
23:41Hope so.
23:41Thanks for having me.
Do Advisors Need More Banks, or Defi?