The cryptocurrency contagion is spilling over into mortgage lenders

Two banks in the cryptocurrency sector have turned to the federal mortgage system to facilitate customer withdrawals.

Silvergate Capital and Signature Bank borrowed billions from the Federal Home Loan Banks, the system created to shore up mortgage lending during the Great Depression, the Wall Street Journal (WSJ) reported on Saturday (January 21).

Signature borrowed nearly $10 billion in the fourth quarter, the report said, citing securities deposits, while Silvergate borrowed $3.6 billion.

The news comes on the heels of reports that both banks have seen increased outflows of cryptocurrency-related deposits from customers, and as the industry as a whole continues to grapple with the aftermath of last year’s FTX crash and of a broader downturn in the industry.

The WSJ notes that loans from Signature, which primarily dealt with multifamily properties before moving into cryptocurrency, are more than double the largest amount borrowed in several years, while Silvergate had no bank loans for home loans l ‘last year.

In a recent earnings call, Silvergate announced a $1 billion loss for the fourth quarter of 2022. CEO Alan Lane told analysts the bank plans to cease offering some cash management services, discontinue some custodial services of cryptocurrencies and eliminate a portion of its product portfolio of digital assets.

As FTX imploded, Silvergate customers withdrew approximately $8.1 billion in deposits in the last three months of 2022.

As PYMNTS wrote last week, “the conversation around cryptocurrencies and their trustworthiness has become increasingly polarized,” with Japan asking regulators around the world to treat cryptocurrency companies with the same level of oversight as traditional banks.

“If you like to implement effective regulation, you have to do the same as you regulate and supervise traditional institutions,” said Mamoru Yanase, deputy director general of the Financial Services Agency’s Strategy Development and Management Office. “What caused the latest scandal is not cryptographic technology per se, but loose governance, lax internal controls, and a lack of regulation and oversight.”

Similar calls have come from officials in the United States, with Sens. Elizabeth Warren, D-Mass., and Tina Smith, D-Minn., who wrote to federal financial regulators late last year to find out how they rate the banking system’s exposure to cryptographic risk.

“Banks’ relationships with crypto firms raise questions about the safety and robustness of our banking system and highlight potential loopholes that crypto firms may be trying to exploit to gain further access to banks,” the senators wrote.

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