I Warned the Senate About a Crypto Crash. Now It’s Coming.

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In The Big Short, the Adam McKay–directed film based on the Michael Lewis book, hedge fund manager Mark Baum (Steve Carell) and his associates team up with Deutsche Bank executive Jared Vennett (Ryan Gosling) to short the housing market prior to the subprime crisis. Halfway through the movie, Carell and Gosling have this exchange:
Jared Vennett: Didn’t I say when we made this deal that the ratings agencies, the banks, and the SEC were clueless? Didn’t I say that? Now their foot’s on fire, their steak is done, and you’re surprised?Mark Baum: That’s not stupidity. That’s fraud. Jared Vennett: Tell me the difference between stupid and illegal, and I’ll have my wife’s brother arrested.
The scene is played for laughs, but it feels uncomfortably real now. Two years ago, we saw a string of banking failures tied to crypto sending shockwaves through the financial system, exposing just how much risk banks had pooled to cater to the industry. While the worst was narrowly averted, the same conditions that sparked that crisis are not only still with us, they’ve metastasized. Thanks to an influx of deregulation and unprecedented political influence, crypto is once again primed to take down the banking system. This time, though, the crash could be even bigger—and we might not be able to bail ourselves out again.
A tremor of this future financial earthquake occurred in March 2023. In the span of five days, three U.S. banks collapsed: Silvergate, Silicon Valley, and Signature. A fourth, First Republic, failed in May. All told, they held more than $400 billion in assets. As the contagion spread, several other banks (PacWest and Western Alliance Bank) teetered on the edge of insolvency. In the end, disaster was averted as the Fed stepped in to guarantee all depositors their money back, and the story soon disappeared from the headlines. But new research points out that the banks’ exposure to cryptocurrency and the wild bets placed on it by venture capital firms were central to their collapse.
In March of this year, Steven Kelly and Jonathan Rose published a working paper for the Federal Reserve Bank of Chicago. In it, they argue, “The 2023 crisis was a crisis of a certain bank business model. Silvergate, SVB, Signature, and First Republic failed; Pacific Western Bank (PacWest) and Western Alliance Bank narrowly escaped failure. These six most-affected banks built their business models around the crypto and venture capital (VC) sectors.”
The previous year, the cryptocurrency industry was decimated as the prices of various coins plunged. Investors raced to withdraw their money but were surprised to find it was no longer there. The headliner grabber was Sam Bankman-Fried and the implosion of his exchange, FTX, but scores of other crypto companies went belly up. Fraud and nefarious activity were often to blame. Hundreds of crypto criminals were arrested, and companies like the exchange Binance paid billions of dollars in fines for their illicit behavior.
But the damage was far from over. By the time I testified to the Senate Banking Committee in December 2022, the potential spillover effects of crypto’s collapse on the banking sector were clear, at least to me. Asked by Sen. Catherine Cortez Masto about how to regulate the notoriously shady industry, I was blunt: “If we allow crypto to infect our banking system, we will be back here. Not in a good way.”
I didn’t know it at the time, but it was already too late. After FTX went down in November, Silvergate Bank lost about half its deposits in a few days. No bank can survive that kind of outflow. As Kelly and Rose point out, the banking sector in 2022 was (rightfully) skeptical of servicing crypto companies. That forced those businesses to park their cash (i.e., uninsured deposits) in the few banks willing to service them: Silvergate, Silicon Valley, and Signature. So when those crypto customers began demanding their real money back, the crypto firms needed to pull the dough from the banks. The result was a classic bank run.
By guaranteeing their money, the Fed likely did the right thing to contain the growing crisis, but neither the crypto companies nor their investors suffered consequences. In fact, by retaining their cash, companies like the behemoth exchange Coinbase and venture capital firm a16z were soon able to use that moolah to influence politicians and regulators at a scale even Sam Bankman-Fried couldn’t have imagined.
Crypto PACs threw a reported $135 million into congressional races in the 2024 cycle, resulting in the election of dozens of pro-crypto legislators. One spent $40 million on Republican Bernie Moreno, who defeated incumbent Sherrod Brown. (Brown had been chair of the Banking Committee to which I testified.) Another dropped $10 million attacking Katie Porter, running for Senate in California, in the Democratic primary. Her opponent, Adam Schiff, was elected instead. A source tied to that super PAC told the New Yorker that the purpose of the spend was “to warn anyone running for office that, if you are anti-crypto, the industry will come after you.”
To make matters worse, Trump’s lackeys have rolled back safeguards put in place under the previous administration. This notably includes his Department of Justice disbanding Joe Biden’s cryptocurrency task force to prosecute crooks in the industry, and the FDIC rescinding a rule requiring banks to notify the Fed before engaging in crypto—greenlighting more high-risk exposure of the kind that tanked Silvergate and Signature.
Legislation on crypto is moving forward after stalling on the Hill, in yet another example that Democrats’ only have so much of a spine. It makes a grim kind of sense: The crypto industry gave truckloads of money to both D’s and R’s; it expects a return on its investment.
So imagine this scenario: It’s a year from now, maybe two. Crypto-friendly legislation is now law, opening the floodgates for all manner of bank exposure to crypto. Next, the economic recession people have been forecasting for years actually happens. Trump’s erratic economic policies and his embrace of tariffs have boosted the chances of one to as high as 70 percent on prediction markets just last month, although they’ve since come down. Historically speaking, though, recessions are unavoidable.
News of a downturn then leads to a sizable drop in the markets. As investors rush to shed themselves of risky assets, crypto, perhaps the riskiest “asset” imaginable, is dumped with ferocity. Soon, there’s a run on the banks, except it’s not like in 2023, it’s far bigger. Instead of only a handful of banks, dozens or maybe even hundreds are affected, including some of the largest in the country. And quelle surprise, we are all obligated to bail the banks out (again) or face global financial armageddon.
Voila! Subprime 2.0 has manifested, and crypto’s the culprit. We’ve learned nothing. We’re in a sequel, but it’s not to The Big Short. We’re in one of the more unwelcome additions to a storied cinematic masterpiece: Dumb and Dumber To.