One of the main banks for the American crypto market - Silvergate - announced its end. Among the reasons that led to its collapse were an unusual trading strategy, the bankruptcy of the FTX crypto exchange and a significant tightening of the policy of the US Federal Reserve Bank (FED). This can impact the liquidity of the crypto market and give regulators a reason to tighten their grip on the crypto industry.
What happened?
Silvergate Bank, one of the major cryptocurrency banks, will close, its parent company Silvergate Capital Corporation announced on March 8. According to the liquidation plan, the bank will repay all its obligations to its clients. As reported by CNBC, Silvergate was the crypto industry's most popular bank along with Signature Bank.
Silvergate was one of the first banks to start working with crypto companies. This happened in 2014 - until then the bank had only a few offices in San Diego and specialized in commercial real estate lending. In the mid-2000s, banks were mostly wary of representatives of the crypto industry. Silvergate began accepting deposits from crypto companies, which eventually made up almost all of its depository portfolio. Soon, the bank divested most of its traditional business to focus on the cryptocurrency sector, providing banking services to such crypto exchanges as FTX, Coinbase and Kraken.
The Silvergate Bank business was different from traditional banking in many ways. The bank did not provide interest on crypto company deposits and did not issue loans, instead depositing all money “in cash” or in securities – mainly US government bonds. However, the bank continued to develop the cryptocurrency sector, launching the Silvergate Exchange Network (SEN) payment platform in 2018 – allowing clients to instantly transfer fiat money to crypto exchanges. Only in IV. quarter 2021, SEN saw $219,2 billion worth of transactions. By the end of 2022, Silvergate had about 900 institutional crypto investors and cooperated with 94 crypto exchanges.
The problems at Silvergate started already last year, when the market capitalization of cryptocurrencies fell by more than 60%. However, the real trigger for the crash was the bankruptcy of one of the largest crypto exchanges, FTX. Silvergate's clientele consisted almost entirely of firms associated with the cryptocurrency industry, which were withdrawing their money en masse from the bank after the FTX shutdown. The volume of interest-free deposits from September to December last year fell from $12 billion to $3,9 billion. In order to meet its obligations to clients, Silvergate had to sell the securities in which it held client funds, but in the last year the value of these securities has fallen due to the Fed's tough policy. As a result, the bank posted a net loss of $1 billion in the final quarter of last year.
In early March, Silvergate announced that it had to increase the sale of securities, which may lead to an undercapitalization of the company. As a result, the share price of the bank's parent company (Silvergate Capital) plummeted, falling more than 25% in one day. Since the beginning of the year, shares have depreciated by more than 80%. Credit organization's key partners in cryptocurrency such as Coinbase, Circle Internet Financial, Paxos Trust Co. and Galaxy Digital Holdings Ltd., ended their relationship with it. On March 3, the Silvergate Exchange Network also went down.
What does it mean?
Above all, the closure of Silvergate will affect the liquidity volumes of the crypto market, writes Barron's. The magazine notes that SEN has played a key role in the interaction between institutional investors and crypto companies. With its help, they could send large sums to exchanges 24 hours a day, which not all banks could afford. Due to the absence of SEN, trading volumes in the currency pair BTC - USD fell to the lowest level in several months, according to the analysis of the Kaiko platform.
Almost every crypto company had an account with Silvergate because SEN made it much easier and faster to transfer money between investors, exchanges and market makers, Ava Labs president John Wu said. "Shutting down SEN will lead to many funds and market makers moving even further away from interacting with the cryptocurrency market," he predicted.
An alternative to SEN is a similar system from Signature Bank. However, at the end of last year, the bank announced the leakage of crypto client deposits amounting to 8,1 billion dollars. The CEO of Signature Bank, Joseph DePaolo, said that the bank plans to reduce the total volume of deposits of crypto companies from 23,5% to less than 15% due to problems in the industry. Since February, the company has stopped processing transactions for clients of the world's largest crypto exchange, Binance, that are less than $100. Morgan Stanley said in a March 000 report that the bank is now the focus of regulators' attention. It was also noted here that the flow of money into the crypto sector will slow due to the limited interaction between fiat money and cryptocurrency.
Against the background of increased attention from regulators, crypto exchanges are restricting the flow of fiat money through the banking infrastructure. Dubai-registered crypto exchange Bybit has announced the suspension of dollar deposits via bank transfer (including SWIFT), citing "partner issues". Binance has suspended dollar transfers since early February. One possible way to transfer capital to the crypto economy is to buy stablecoins. Market participants can buy the stablecoin USDT, whose value is pegged to the dollar, and if they need to buy Bitcoin, they can send the coins to an exchange, bypassing a traditional bank.
Regulators, for their part, may also see the Silvergate crisis as another reason for the cryptocurrency sector to move away from the banking system, Barron's reports. In February, the Federal Reserve and the Federal Deposit Insurance Corporation urged banks to pay more attention to the risks associated with crypto client money and its leakage. Federal Reserve Chairman Jerome Powell also urged banks to be cautious in their dealings with the cryptosphere. “While the crypto space is very chaotic,” he stated.
