The crypto industry is preparing for the consequences of Silvergate Bank’s exit, which may increase risks related to banking concentration and pose new challenges for venture capital firms, according to sources. Although the closure of Silvergate Bank is not a systematic risk for the US banking system, it could have a significant impact on the crypto markets. The move will affect a “huge number of market makers and exchanges” that relied on the bank to process instant crypto-fiat transactions. As Silvergate winds down operations, risk concentration in the industry will increase, with few banks still partnering with crypto firms.
Silvergate had been a crypto-fiat gateway network for financial institutions and a significant on-ramp for cryptocurrencies in the United States. However, on March 8, its parent company, Silvergate Capital Corporation, announced its plans to “voluntarily liquidate” assets and shut down operations. This move could potentially mean a certain trend towards crypto moving outside the US, at least until a more comprehensive regulatory framework is established.
The consequences of Silvergate Bank’s closure will be felt beyond the crypto industry. The move could increase banking concentration among a few partners and present challenges for venture capital firms seeking to establish banking relationships in the country. The bank run on Silvergate was different from previous failures within the space, as it seems like a genuine bank run, according to experts. Unlike Luna and FTX, which tried to spin their collapse as a bank run when they were actually insolvent, the Silvergate situation appears to be different.
The outflows in 2022’s fourth quarter resulted in a $1 billion net loss attributable to common shareholders, and the transfer volume on the Silvergate Exchange Network in the previous quarter was $112.6 billion, a $50 billion plummet compared with Q3 2021. The bank had attracted a lot of crypto deposits, and as knock-on effects of FTX contagion started to catch up, the bank faced substantial deposits’ outflow. This forced them to sell off bonds, resulting in material losses as interest rates increased recently. A downward spiral ensued with rapidly worsening capital adequacy ratios, which led to more clients withdrawing funds.
Some believe that US authorities are discouraging banks from offering services to the crypto industry, using “multiple agencies to inhibit banks from dealing with crypto firms,” leading crypto businesses to become “completely unbanked.” Recent regulatory developments were among the reasons mentioned by Silvergate to end its crypto banking business. However, US authorities’ crackdown on the industry may increase the number and quality of banking relationships with the industry over time.
As banks sever relationships with crypto companies, Binance announced a temporary suspension of bank transfers of US dollars in February. Just a few weeks before, in January, the crypto exchange said its SWIFT transfer partner, Signature Bank, would only process trades by users with US dollar bank accounts over $100,000.
This news comes as a setback for the crypto industry, which has seen a surge in interest and adoption in recent years. However, despite the challenges that the closure of Silvergate Bank presents, there is optimism for the future of the industry. Some experts believe that the crypto industry is in the process of building a better, more equitable financial system in the United States and globally. Looking ahead, the industry may face short-term challenges as it adjusts to the loss of a significant player like Silvergate Bank. However, in the long run, the industry is likely to continue to grow and mature, as new players enter the market and new partnerships are formed. Ultimately, the closure of Silvergate Bank is a reminder of the risks and uncertainties that the crypto industry faces and the need for greater regulatory clarity and stability.