So, recently, three well-known banks – Silicon Valley Bank, Silvergate Bank, and Signature Bank meltdown faster than a lead balloon. This caused some serious commotion both in the traditional banking world and in the crypto sphere. In this article, we’ll spill the tea on why Silvergate Bank went belly up, what it means for the crypto industry, and what the political and crypto bigwigs have to say about it.
Silvergate Capital has said it is winding down its operations and going into voluntary liquidation
One of the major banks that dealt with the cryptocurrency industry, Silvergate Bank, will be closed, announced its parent company Silvergate Capital Corporation on March 8th. As per the liquidation plan, the bank will settle all its obligations to its clients. According to CNBC, Silvergate was the most popular bank among companies in the blockchain industry.
What is the source of Silvergate Bank’s problems?
Silvergate’s problems began last year when the market capitalization of crypto tokens fell by more than 60%. However, the actual trigger for the bank’s collapse was the bankruptcy of one of the largest crypto exchanges, FTX. Recall, On November 11, 2022, FTX filed for bankruptcy following a surge in customer withdrawals at the beginning of the month. A few hours after filing for bankruptcy, the company was hacked, and digital wallets were emptied over the course of several days. CEO Sam Bankman-Fried acknowledged that the company did not have enough assets to meet the demand of its clients.
Silvergate’s client base was almost entirely composed of companies related to the blockchain industry, and began to massively withdraw funds from the bank. As Bloomberg notes, the rise in interest rates led to banks being burdened with low-yielding bonds that cannot be sold quickly and without losses, which is why mass withdrawals of deposits by clients can lead to the formation of a vicious cycle.
The volume of interest-free deposits from September to December last year fell from $12 billion to $3.9 billion. To fulfill its obligations to clients, Silvergate had to sell securities in which it held client funds, but due to the Federal Reserve’s strict policy in the last year, the value of these securities decreased. As a result, the bank’s net loss for the fourth quarter of last year amounted to $1 billion.
How did this affect the volatility of the crypto market?
After the announcement of American bank Silvergate’s voluntary liquidation, Bitcoin stabilized near its lowest level since mid-February, according to Reuters. At the time of the announcement, Bitcoin was trading at $21,624, down 2.2%.
However, globally, this announcement seems to have had a limited impact on the crypto market: the effect of Silvergate’s collapse considered an important bridge between the crypto sector and the traditional financial world, was limited, and a number of the bank’s partners, including major cryptocurrency exchanges, severed ties with Silvergate.
Who refused to cooperate with Silvergate Bank?
On March 1, Silvergate announced that it would postpone the filing of its annual financial report with the US Securities and Exchange Commission (SEC) for two weeks, as it was forced to reassess its ability to continue operations. The bank reported that it had to increase the sales of securities, which could lead to “inadequate capitalization” of the organization, and its losses for last year could further increase.
As a result, the value of the bank’s parent company’s stock (Silvergate Capital) plummeted – shares fell more than 25% in a day. Since the beginning of the year, the shares have depreciated by more than 80%. After the bank postponed the report to the SEC, major bank clients such as Coinbase, Gemini, Crypto.com, Galaxy Digital, Bitstamp, Cboe Digital, Paxos, and Circle began to refuse to cooperate, sensing that something was amiss.
On March 3, Moody’s Investors Service downgraded the bank’s long-term rating, after which it announced the closure of the money transfer system known as the Silvergate Exchange Network (SEN). It was the gateway for dollar deposits from all the bank’s cryptocurrency clients, including major exchanges, miners, and market makers.
Political leaders on the collapse of the bank
Political leaders have shared their thoughts on the bankruptcy of Silvergate Bank and the potential risks and impact it poses to the financial sector.
Senator Elizabeth Warren, who is known for her criticism of cryptocurrency, expressed her opinion on Twitter soon after Silvergate’s announcement. She wrote, “As the bank of choice for crypto, Silvergate Bank’s failure is disappointing but predictable. I warned of Silvergate’s risky, if not illegal, activity—and identified severe due diligence failures. Now, customers must be made whole, and regulators should step up against crypto risk.”
While Senator Sherrod Brown expressed concern about the spread of risk across the financial system and its potential cost to taxpayers and consumers. He said, “Today we are seeing what can happen when a bank is over-reliant on a risky, volatile sector like cryptocurrencies. I’ve been concerned that when banks get involved with crypto, it spreads risk across the financial system, and it will be taxpayers and consumers who pay the price.”
The failure of Silvergate Bank, which was heavily involved in the crypto industry, serves as a cautionary tale for other financial institutions considering entering this sector.
Crypto leaders about the bank’s collapse and politician’s contributed to it
Earlier this year, US banking authorities issued a regulation warning banks about the risks associated with serving companies involved in the digital economy, as reported by Reuters. However, crypto industry leaders spoke out against this assessment, stating that Silvergate’s collapse was more a result of traditional banking risks rather than vulnerability to cryptocurrencies.
As Caitlin Long, founder, and CEO of Custodia Bank, explained in a comment to CoinTelegraph, Silvergate would have survived the bank’s bankruptcy without damage to its capitalization if it had enough cash on deposit to meet customer withdrawal requests.
Dave Weisberger, CEO of CoinRoutes, an algorithmic trading platform, believes that the risk of Silvergate’s troubles spreading to other banks is minimal. “The problems that faced Silvergate were primarily a result of less-than-adequate risk management, notably one of relying too much on volatile short-term deposits while lending or investing at a longer duration,” Weisberger said.
In Conclusion
The failure of Silvergate Bank highlights the need for careful consideration of the risks associated with digital currency and the potential impact on the financial system as a whole. The political leaders’ statements also emphasized the need for caution, while crypto industry leaders pointed out that the collapse of Silvergate was more a result of classic banking risk than vulnerability to digital assets.
