Silvergate Bank, perhaps at one time the most important financial institution in crypto, will wind down after a period of cataclysmic withdrawals and a failed bailout from a federal mortgage backer. The bank's conversations with the FDIC last week, reported to be a way to avoid a shutdown and shore up liquidity in retrospect, look like the nail in the coffin rather than a sign of life.
Silvergate, which began during the savings and loan era and was the first bank to see an opportunity in crypto, essentially became a financial zombie after overgrowing itself in a volatile sector.
It took on a massive amount of crypto deposits ($13.2 billion at the end of September) and, like all banks, invested those in safe yield-bearing assets like U.S. Treasuries and other bonds. However, following the collapse of FTX, a wave of customer withdrawals and required payments on a Federal Home Loan Bank loan forced the bank to sell off assets before they reached maturity causing a mismatch – it reportedly lost over $1 billion last in Q4 2022.
No lie, the situation isn't great for crypto. Bitcoin is trading down significantly on the news, and there are possible spillover effects to worry about. But this moment is also an opportunity for many. Who and what – apart from the short sellers who already made their profits – could benefit from Silvergate-gate?
Other banks
At the first sign of blood in the water a number of crypto firms including Coinbase, Paxos and Galaxy switched to Silvergate's top competitor, the New York-based Signature Bank. Signature, despite announcing some months ago that it would be curtailing its exposure to the crypto industry, could stand to benefit significantly – but is hardly the only bank or credit union that could see an opportunity. Even as banking industry overseers caution traditional-finance firms from dealing with crypto companies, many crypto firms remain well-capitalized (as the $8 billion worth of withdrawals from Silvergate would imply) – and need to park that somewhere. And that's exactly what due diligence is for!
Stablecoins
On Monday, Kaiko analysts reported that "stablecoins will likely become even more ubiquitous among traders," with the "death" of the Silvergate Exchange Network, or SEN, an internal system Silvergate created to allow its clients to easily swap capital, which was shutdown prior to the bank's unwinding. In fact, on centralized exchanges, the volume of stablecoin transactions rose to 90% from 79% last year, replacing in particular USD-based trading pairs, CFA Conor Ryder noted. U.S. corporate stablecoin issuers are having problems of their own getting banking status, and many will be affected by Silvergate's collapse.
Europe
Unlike the U.S., the European Union has been taking a proactive view towards regulating the crypto economy. The Markets in Crypto-Assets Act (MiCA) is a broad set of rules expected to go into effect soon, providing clarity for both crypto companies and financial institutions that would serve them. The ongoing banking crisis in the U.S. could only catalyze the trend of firms looking overseas to set up shop. One indication of this, perhaps, as Ryder noted, "the BTC-Euro pair hit its highest level of market share vs. [USD] ever last week, nearly tripling in market share in the space of a few weeks."
Payments providers
On Monday, crypto banking firm BCB Group CEO Oliver von Landsberg-Sadie told CoinDesk's Ian Allison that his company's payments processor is accelerating plans to add U.S. dollar capabilities to help fill the hole left by SEN. BCB launched its real-time settlement network, the BCB Liquidity Interchange Network Consortium, or BLINC, in mid-2020 and currently handles euros, British pounds and Swiss francs. Institutions like BCB, which on-ramp banks into crypto, could become increasingly valuable as a way to absorb some of the risks.
– D.K.
@danielgkuhn
daniel@coindesk.com
