Multiple sources told Cointelegraph that the closure of Silvergate Bank is not a systemic risk to the U.S. banking system, but could have a significant impact on the crypto market. The consequences could include increasing the concentration of the banking industry among a small number of partners and creating challenges for venture capital firms seeking to establish banking relationships in the country.
Silvergate, once a network of crypto-fiat gateways for financial institutions and an important gateway to cryptocurrencies in the United States, on March 8, its parent company Silvergate Capital Corporation disclosed its plans to “voluntarily liquidate” assets and close operations.
Mark Lurie, co-founder and CEO of decentralized development firm Shipyard Software, explained that the move affects “a large number of market makers and exchanges” that rely on banks to process instant crypto-fiat transactions. With Silvergate winding down, he said, risk concentration in the industry will also increase, with few banks still working with crypto firms.
“When I returned to Bitcoin in 2011, it never occurred to me that the FDIC-insured banks involved in the industry would actually fail. This is certainly a setback, the effects of which will reverberate throughout the digital asset industry for some time. Given recent regulatory moves, I suspect it will be difficult for crypto businesses to secure banking relationships in the U.S. for some time,”. The collapse of cryptocurrency exchange FTX has caused widespread liquidity problems at Silvergate, although the bank has already been affected by the cryptocurrency market downturn in early 2022. Outflows in the fourth quarter of 2022 resulted in a net loss of $1 billion attributable to common stockholders. Transfer volume on the Silvergate exchange network was $112.6 billion last quarter, a plunge of $50 billion compared to the third quarter of 2021.
“The bank attracted a lot of deposits in crypto, and as the ripple effect of the FTX contagion started to catch up, the bank faced a massive outflow of deposits. This forced them to dump bonds, causing heavy losses as interest rates have risen recently,” said a spokesperson for Finery Markets explained, adding: “What ensued was a downward spiral with rapidly deteriorating capital adequacy leading to more client withdrawals. This could signal some movement of cryptocurrencies outside of the United States, at least until more comprehensive regulation is established That's how it was before the frame."
According to Lurie, the bank run on Silvergate was unlike previous failures in the space. “Unlike Luna and FTX, which tried to describe their collapse as a bank run when they were actually insolvent, what happened with Silvergate appears to be a real bank run. [...] This is the fine line between a bank run and a fraud difference," he said.
As Cointelegraph reported, some believe that U.S. authorities are preventing banks from providing services to the crypto industry. The alleged tactics include using "multiple agencies to prevent banks from dealing with crypto companies," resulting in crypto businesses becoming "completely unbanked."
Binance announced in February that it was temporarily halting bank transfers in U.S. dollars as banks cut ties with cryptocurrency firms. Just a few weeks ago in January, the cryptocurrency exchange said its SWIFT transfer partner, Signature Bank, would only process transactions for users with USD bank accounts above $100,000. Recent regulatory developments are one of the reasons Silvergate cited for terminating its crypto banking operations. However, Shrem said that over time, the U.S. authorities’ crackdown on the industry is likely to increase the quantity and quality of banks’ relationships with the industry:
“Looking ahead, I can’t help but be optimistic. The industry has grown by leaps and bounds, especially for such a young industry, and I still believe we are building a better, fairer financial system in the U.S. and globally.”
