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What is the Silvergate Crisis and its Impact on Crypto?

What is the Silvergate Crisis and its Impact on Crypto?

Silvergate Bank announced today that it would be winding down operations and liquidating its bank. Citing regulatory concerns and recent crypto industry developments, Silvergate Bank “believes that an orderly wind-down of Bank operations and a voluntary liquidation of the Bank is the best path forward.” Users will be further notified should there be any changes. The liquidation and wind down would include full repayment of all deposits.

What is Silvergate?

Silvergate Capital, the parent company of Silvergate Bank, a California-based community bank launched in the 1990s. In recent years, after their acquisition of Diem assets from Meta, the company pivoted to servicing cryptocurrency businesses by offering traditional financial services to crypto exchanges.

As Silvergate was one of the first banks to offer these services to crypto companies, they quickly grew to become an essential part of the entire crypto ecosystem. A key service that Silvergate provided was Silvergate Exchange Network (SEN). SEN is an instant payment platform that enables Slivergate’s clients to send US Dollars to any Silvergate account, outside of regular banking hours.

With the purchase of Diem assets from Meta and their previous involvement of Libra, many shareholders of Silvergate were excited with the prospect of the company issuing their own stablecoin.

What happened to Silvergate?

Though the bank did not deal with cryptocurrencies directly as their deposits or withdrawals were serviced in fiat currencies, many of its clients were crypto exchanges, with FTX a key Silvergate client.

In Jan 2023, the bank reported a loss of $1 billion for the fourth quarter of 2022. Q4 2022 saw the implosion of FTX, Silvergate’s biggest client, resulting in investors’ loss of confidence. This saw a huge influx of users withdrawing their deposits from Silvergate Bank. The company survived FTX’s implosion but was forced to cut staff headcounts by at least 40%.

The problem that Silvergate Bank faced was a result of less-than-adequate risk management, by relying too much on short-term deposits while lending out money for a longer duration. Silvergate Bank has $13.9 billion in deposits at the end of September 2022. However, when the crypto meltdown started in Q4 of 2022, crypto investors panicked and started withdrawing funds from crypto exchanges, which in turn was withdrawn from Silvergate. By the end of December 2022, Silvergate Bank’s deposits were down to $3.9 billion.

This left Silvergate with an $8 billion deficit in deposits. To raise funds, Silvergate did two things: they borrowed $4.3 billion worth of short-term loans from the Federal Home Loan Bank of San Francisco, and sold bonds that were in their portfolios.,

The selling of bonds brought up another set of problems. Of the $11.4 billion in bonds, $8.3 billion was “available for sale”, a term used to describe a security that could be sold without holding to maturity. This meant that Silvergate had to price them at the market value. The remaining $3.1 billion was a Hold to Maturity bond, so marking them at cost price would not make a difference. By the end of December 2022, with interest rates rising, Slivergate’s bond portfolio was valued at $5.7 billion, a loss of its initial bond investments of $11.4 billions.

As FTX was Silvergate’s largest customer, they came under the scrutiny of US Senators - Elizabeth Warren, John Kennedy, and Roger Marshall - who began investigating Silvergate's operations to determine if the bank was facilitating fraudulent transactions between FTX and Alameda Research, the investing arm of FTX.

On 1st March 2023, Silvergate Bank delayed its annual earnings and auditing reports, claiming that they were evaluating its ability to operate. With the delay, their stock plunged from US$13 to US$5.21.

What are the possible impacts on crypto?

If you have used a USD on-ramp or off-ramp through a centralized crypto exchange, it’s probable the fiat ramps are powered by Silvergate Bank. While the shutdown of the bank and its future is unclear, there are other crypto-friendly banks such as Signature Bank, which offers Signet - an alternative to SEN. However, regulators will be much stricter with banks when it comes to offering banking services to cryptocurrency clients.  

The loss of Silvergate would impact the ecosystem as the technology has been a convenient bridge between traditional finance and crypto, setting back fiat to crypto adoption developments.

The Kaiko report mentioned that stablecoins might see an increase in adoption and ubiquity among traders, with the death of SEN.

This article is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice.


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