Silvergate’s clients fled as the stock price plummeted and regulatory questions rose across the industry. The options for crypto banking partners are few and far between.
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Trouble Brewing In Crypto-Land
Developments around crypto on- and off-ramps have heated up, as Federal Reserve Bank Member Silvergate Capital watched depositors flee and stock prices plummet. Along with Signature Bank, Silvergate is another major US bank that works closely with the crypto sector.
The reason for the extreme concentration of banking interests willing to deal in the crypto sector is the lack of general regulation on know-your-customer and anti-money laundering (KYC / AML) policies that exist in the industry for offshore entities, as well as problems with the industry more wide range of unregistered security offers and many scams.
Of course, we believe there is a clear distinction between bitcoin and the general term “crypto”, but the line remains blurred for many regulators and government agencies.
Thus, there have historically been few entities in the regulated US banking system that have been willing to partner with crypto companies to access the established USD on- and off-ramp, which presents a unique challenge for companies in the business of moving money. and/or payment and transaction processing.
As for Silvergate, we’ve been monitoring the situation closely since November – after the collapse of FTX – as it appears that Silvergate plays a role in FTX and Alameda service by providing access to USD rail.
As we wrote on November 17, (emphasis added):
“Who else is at the center of many institutions in the market? Silvergate Bank is one of them. Since the beginning of November, its shares have fallen by almost 56%. Silvergate Bank is at the nexus of banking services for all industries, serving 1,677 digital asset customers with digital asset deposits of $9.8 billion. FTX is less than 10% of deposits and the CEO has tried to assure the market that the current loan book has experienced zero losses or liquidations so far. Leveraged loans are secured by bitcoins that can be liquidated if necessary. However, the ongoing risk is a full bank in deposits Silvergate. Although the CEO’s comments were encouraging, the stock’s performance over the past two weeks tells a different story. – The Contagion Continues: The Genesis of the Next Major Crypto Lender On the Chopping Block
Since the implosion of FTX, the shares of Silvergate Capital have fallen by 83%, putting the current drawdown from the all-time high price at an eye-watering 97.3%.
As referred to in the November 17 article, Silvergate’s share price did not explode due to the performance of crypto tokens as happened to many companies in the crypto season of 2022, but from the exodus of deposits that forced the company into liquidation for a long time. -duration of securities at a loss to remain liquid.
The link to the tweet is attached.
As a traditional fractional reserve bank, Silvergate takes client deposits – which are set to increase dramatically in 2021 – and lends the money over long periods of time, mainly in US Treasury bonds. In practice, companies would lend money to Silvergate by putting down 0% to use the Silvergate Exchange Network (SEN), and Silvergate would then lend the same dollars at a higher interest rate over a longer period of time. This is a good business model – as long as your debt doesn’t go down at the same time as the client withdraws funds.
“Customers withdrew about $8.1 billion in digital asset deposits from banks during the fourth quarter, which forced the sale of related securities and derivatives at a loss of $718 million, according to a statement Thursday.” – Silvergate Tumbles After FTX Implosion Prompts $8.1 Billion Bank Run
As comments have ramped up about the incompetence and irresponsibility of the Silvergate management, we must interpret some of the nuances surrounding the situation.
The link to the tweet is attached.
The majority of Silvergate’s deposits come in a world of zero interest rate policy, where short-term Treasury securities offer 0%. This phenomenon is one of the main reasons why Silvergate invests in longer instruments. The bond fell as global interest rates rose in 2022.
With long-term debt securities, money will not be lost in the event of an increase in interest rates as long as the bond is held to maturity (and not defaulted upon), but in the case of Silvergate, the depositors fled forcing companies to realize unrealized losses in their portfolio of securities – a nightmare for institutions fractionally reserved.
With solvency worries in recent months, frontran companies are speculating about exposure to banks, with names such as Coinbase, Paxos, Circle, Galaxy Digital, CBOE and others communicating about their banking relationship with Silvergate. Coinbase has emphatically announced its move to Signature bank.
“We facilitate fiat withdrawals and deposits using Signature Bank, effective immediately.” – Coinbase memo
The only concern is that many of these companies have just moved to Signature bank, which is more focused on the off- and on-ramps currently used by the crypto industry, although Signature has a larger market capitalization and a larger depositor base than Silvergate.
The current state of Signature’s digital asset deposit base is unknown, as the company announced its desire to reduce reliance on crypto-related deposits in early December.
“Signature Bank (SBNY) will reduce deposits tied to cryptocurrencies by $8 billion to $10 billion, marking a move away from the digital asset industry for the bank that until now has been one of the most crypto-friendly companies on Wall Street.
“We are not just a crypto bank and we want that to come across strong and clear,” Signature Bank CEO Joe DePaolo said at an investor conference in New York held by Goldman Sachs Group on Tuesday. — Coindesk
The timeline of the event is significant as the new developments in industrial aviation from Silvergate come at the same time Signature appears to be tied to using rail with major industry players.
A final note
After the disastrous 2022, the regulators are pursuing a careful examination of the crypto sector, and one of the main targets is the connection between the industry and the legacy banking system. While Silvergate appears to be dead in the water with almost all major industry players announcing plans to sever ties, the growing reliance on Signature Bank, a bank that has announced its intention to leave the board, remains… worried.
While this does not pose a fundamental risk to the functioning of the Bitcoin network or its property as an irreplaceable settlement layer, the clampdown and increased centralization of the USD on-and off-ramp is a major risk to short- to medium-term liquidity in bitcoin. and the broader crypto market.
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Relevant past articles:
- The bigger…
- Exchange War: Binance Smells Blood As FTX/Alameda Rumors Mount
- Crypto In The Crosshairs & Bitcoin Futures
- Genesis Files For Chapter 11 Bankruptcy, Owes More Than $3.5 Billion To Creditors
- Counterparty Risk Happens Fast
- Collapse of Bids Generates Crypto Signals ‘Dress Extreme’
- The Crypto Contagion Intensifies: Who Else Is Swimming in Feathers?
- The Contagion Continues: The Next Major Crypto Lender Genesis Is On The Block