By Pam Martens and Russ Martens: June 21, 2022 ~
Ronald P. O’Hanley, Chairman and CEO, State Street
There have been a number of articles lately attempting to reassure Americans that the crypto carnage will not cause financial instability or an economic collapse in the U.S. like that of 2008. The fact is, absolutely no one can say with any degree of certainty what will be the outcome of this unprecedented era of reckless investing. That’s because anything that causes the megabanks on Wall Street to pull back from lending to one another or to major counterparties – out of fear that the institution has dangerous crypto exposure – could cause the same contagion effect that occurred in 2008 from opaque derivatives and toxic subprime debt exposures.
We decided to have a look at the websites and quarterly SEC filings (10-Qs) made by the megabanks on Wall Street, the ones that since the repeal of the Glass-Steagall Act in 1999 are allowed to own both sprawling trading casinos as well as giant federally-insured commercial banks. The megabanks we looked at are also known as G-SIBs (Global Systemically Important Banks) – meaning their insolvency, or even a rumor of their entanglements with crypto could produce systemic effects.
It didn’t take long to get a knot in our stomach. One of the largest custodian banks on Wall Street is State Street, which is custodian and/or administrator to $41.7 trillion (yes, trillion) in assets as of March 31, 2022 according to its 10-Q. It also owns a federally-insured bank by the same name that holds $176 billion in deposits as of March 31 according to the FDIC. Here is the stomach-churning part: it has been promoting its leap with both feet into crypto. One of its divisions is called State Street Digital Solutions, which is harrowingly described as follows on State Street’s website:
“Digital Asset Services
“Mirroring our long-established global custody offering, we are building a leading digital asset network by harmonizing our operating model and providing our clients with a seamless experience to hold traditional and digital assets. We are working on a service that allows clients to store digital assets, starting with bitcoin and ether, in a segregated safekeeping account, offering services first in Germany, the US and Canada, and later expanding across other jurisdictions and assets.
“Digital Cash
“State Street is a founding member of Fnality, a payment solution providing a digital cash asset backed 1:1 by Central Bank deposits. Fnality has already applied to open one of the Bank of England’s new Omnibus accounts, that enables account holders to settle transactions in central bank money through a wide range of innovative payment services.
“Tokenization
“In addition to investing in specialist firm Securrency to further enhance our tokenization efforts, State Street Digital has created a range of tokenization solutions for use in areas from the lifecycle of trades to collateralization. Our industry firsts include: proof of concepts for tokenizing fund shares in partnership with asset managers; automating the over-the-counter lifecycle of foreign exchange non-deliverable forwards (NDFs); and digitized trade processing on our front-to-back platform, State Street AlphaSM, which provides easy access to aggregated data, analytics and real-time insights in one place.
“Trading
“Digitization will affect trading on many levels, from facilitating complete automation to the emergence of peer-to-peer and decentralized finance (DeFi) models, as well as funding model considerations. We are building cryptocurrency trading infrastructure that is scalable, resilient and secure, and allows for capital-efficient trading. State Street is uniquely placed to meet the needs of the institutional market given our extensive e-trading experience. We have been actively enhancing our FX trading software platform, Currenex®, as a solution to power institutional crypto markets. Currenex is already providing the infrastructure for Pure Digital, a UK-based over-the-counter crypto trading platform for institutional investors.”
State Street notes this in a footnote: “The development, release and timing of any product, features or functionality described remain at the sole discretion of State Street and are subject to the firm’s internal governance and due diligence approval process.”
So exactly how much actual exposure to crypto does State Street have as of now? No one knows. Its 10-Q is almost three months old and even that 10-Q does not specify any specific dollar amount related to crypto. The 10-Q offers this ambiguous statement as to risks related to crypto:
“Our development and completion of new products and services, including State Street Digital or State Street Alpha, and the enhancement of our infrastructure required to meet increased regulatory and client expectations for resiliency and the systems and process re-engineering necessary to achieve improved productivity and reduced operating risk, may involve costs and dependencies and expose us to increased risk….”
State Street’s latest 10-Q filing with the SEC was prior to the implosion of all things crypto. It was prior to the Celsius Network locking withdrawals to $11.8 billion of crypto investors’ money; it was prior to Terraform Labs blowing up $40 billion in cryptocurrencies TerraUSD and its sister Luna. It was before Bitcoin collapsed to less than $19,000 during intraday trading this past weekend, bringing its loss at that point from its November highs to more than 72 percent.
It was also prior to economist Nouriel Roubini calling crypto a Ponzi scheme, echoing the same sentiment from former Labor Secretary Robert Reich in the Guardian newspaper. And it was prior to 26 scientists and software engineers, who have since been joined by hundreds of others, signing a letter to Congressional committee chairs that outlines why crypto and blockchain have been a sham from the very beginning.
One way to assess how much damage State Street’s association with crypto has done to its reputation and financial stability is to look at its share price. It’s not a pretty picture.
State Street closed the last day of trading on December 31, 2021at $93 a share. As of last Friday’s close, its share price had tumbled to $61.75 – a plunge of 34 percent year-to-date. That was the worst performance when measured against year-to-date losses at JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley and Bank of New York Mellon.
Federally-insured banks are required by law to avoid any activities that would undermine their safety and soundness. It’s time for federal regulators to enforce that requirement before the damage is done, not long after it’s done.
State Street was not the only cause for alarm among the megabanks. We’ll have further reports as we complete our research.
