Silvergate Bank is the bank for crypto businesses that tend to have problems maintaining banking relationships.
Crypto exchanges in particular liked Silvergate because a) they give access to banking in the first place and b) Silvergate ran the Silvergate Exchange Network (SEN), which was recently disabled. SEN allowed 24/7 instant settlement between Silvergate bank clients at any time. This attracted a lot of crypto exchange clients like Binance.US, Kraken and Gemini.
The lauded SEN was shut down last week following Silvergate running into a brick wall of trouble which was punctuated with its stock ($SI) losing over 50% on Thursday alone.
The spectacular downfall came as a result of the FTX collapse late last year which led to billions of dollars in deposit withdrawals. Silvergate subsequently dipped into the Federal Home Loan Bank system to prop up operations and after U.S. Senator Elizabeth Warren (D-Mass.) sent Silvergate a scathing letter and the White House published its road map for driving a wedge between banks and crypto there were even more withdrawals at Silvergate.
To be clear, the regulators and politicians didn't actually say that crypto exchanges and companies shouldn't be banked, but they injected uncertainty. And the funny thing about Silvergate is that it didn't run into issues because it was making loans using bitcoin and crypto as collateral, like other notable bankruptcy cases. It ran into issues because of a bank run. A bank run which was encouraged by the government.
Silvergate's recent woes remind me of two critical points.
First, banks and crypto can coexist (yes, even in a hyperbitcoinized world) and in my view they will and should. Just because the option to opt out of using a bank exists with bitcoin or some other crypto doesn't mean that everyone will shun banks entirely. In fact, honest banking can be a net positive.
The world that bitcoin and crypto can encourage is a world where those third parties are more honest. More honest banks in the business of keeping your money safe and providing responsible lenders access to future capital (i.e. credit) is better than fewer honest banks.
Hand-wavy, I know. But potentially true.
And second, crypto companies needing banks to "skirt the banking system" highlights exactly why the banking system needs to be skirted (or at least somehow broken up). Right now, we see what an implicit promise of future bank regulation from the U.S. government can do to an industry. And while I don't think this is a good thing, it can be if not overdone.
If the result of the promise of future bank regulation is a higher bar for banking access for crypto companies that leads to more thorough diligence which somehow results in fewer bad companies in the ecosystem, ultimately retail will be safer and the system less sensitive to future crypto shocks.
Maybe that is what happens. So, for now, I choose cautious optimism.
– George Kaloudis
@gckaloudis
george@coindesk.com
