Silvergate Capital Corporation Will Wind Down Operations Of Silvergate Bank – What Does This Mean For Cryptocurrency?
Mitchell Nixon
Silvergate Capital Corporation, the parent company of Silvergate Bank, which is known as a major crypto bank, has announced its plans to wind down and liquidate the bank.
The company cited recent industry and regulatory developments as the reason for the bank’s voluntary liquidation. Silvergate Capital Corporation has stated that the liquidation plan for Silvergate Bank will involve the full repayment of all deposits.
In March, several crypto firms, including Coinbase, Paxos, Gemini, BitStamp, and Galaxy Digital, announced they would sever ties with the bank following an investigation into its alleged involvement in the collapse of FTX. The bank also closed its exchange network on March 3, claiming it was a risk-based decision.
Silvergate was a significant banking partner for numerous crypto firms, but its solvency became a concern when it announced a two-week delay in filing its annual 10-K report, which provides an overview of a company’s financial situation. With Silvergate’s liquidation, it remains uncertain how other crypto firms with funds tied to the bank or exposed to it will be affected
The bank also reported a decline of around $50 billion in the transfer volume of consumer fiat deposits in Q3 2022 compared to the same period in 2021.
What is clear is that it will likely increase regulatory scrutiny on the ties between the banking sector and the crypto industry in the United States are expected to face greater regulatory scrutiny.
Silvergate’s collapse will strengthen the U.S. regulators’ position that crypto poses a risk to the traditional financial system, as it was one of the few regulated financial institutions that provided banking services to crypto firms and exchanges. Earlier this year, U.S. banking regulators cautioned banks about the potential risks of serving crypto-related firms.
However, some in the crypto industry contested this argument, stating that the failure of Silvergate was due more to traditional banking risks than its exposure to crypto assets.
According to Caitlin Long, the founder and CEO of Custodia Bank, Silvergate could have survived the bank run and preserved its capitalisation if it had held sufficient cash in its deposits to fulfil customers’ withdrawal requests.
And thus far, BTC is disagreeing with the notion that crypto would be largely negatively affected, rallying over 25% since the news broke about Silvergate Bank.
Additionally, Silicon Valley Bank has collapsed since the news of Silvergate broke, in which we have done an article here.
It should be worth noting that According to sources, the collapse of Silvergate Bank is unlikely to have a long-term impact on the crypto industry. While FTX’s bankruptcy in November 2022 caused significant damage to numerous crypto firms, including Silvergate Bank, the fallout from the bank’s liquidation is expected to be more contained.
It could also serve as a reminder of the importance of diversification in risk management, a principle that is often forgotten in times of market growth. However, there may be short-term consequences, including increased difficulty and cost for crypto companies seeking banking services in the US, and turmoil is not limited to the US alone.
Still, this is no FTX situation, and thus the FUD may be a little over the top.
“For crypto, FTX was a big issue not just because of the volume but because of the staggering depth of the fraud and mismanagement. Silvergate appears to have just messed up asset-to-liability matching, which is an age-old problem in banking. It was not that the CEO was stealing billions from the customers.” Austin Campbell, an adjunct professor at Columbia Business School and managing partner of Zero Knowledge Consulting stated.
“FTX was a much more serious problem,” agreed Justin d’Anethan, institutional sales director at the Amber Group — a Singapore-based digital asset firm. D’Anethan added, “Countless entities were funded, trading, custodied, earning yields and lending to either FTX the exchange or Alameda the fund. That rippled into the entire crypto space.”
Silvergate may have an impact in the U.S., “but it still leaves crypto [firms] with many alternatives and substitutes, and, if anything, the impetus to be more decentralised,” d’Anethan continued. In the short term, “other crypto-friendly banks like BCB, Prime Trust, SEBA” offer on-ramp/off-ramp and FX conversions. “Naturally, for mainstream or institutional adoption, you do need fiat rails for fresh capital to come into crypto markets. But, at this point in time, there’s nothing that makes me think we’ll be lacking those.“
There is a possibility that a few U.S. crypto firms may have to search for alternative banking services, and traditional banks may be cautious about accepting deposits related to crypto. Nevertheless, the budding crypto industry is not disappearing, as per Dickinson Wright’s Silvia’s opinion. The present disruption is a part of the industry’s growth process, and the elimination of bad actors is necessary at this phase.
Bitcoin is here to stay. It is the alternative to this mayhem.
Just remember, 21 million forever.
Banks can go down, offline, or insolvent, but the Bitcoin network never goes down!
