Silvergate Capital Corporation has revealed that it will close its operations due to “recent industry and regulatory developments”. The company confirmed that the liquidation of Silvergate Bank would involve the complete repayment of all customer deposits.
This decision follows the withdrawal of support by various crypto companies, including Coinbase, Paxos, Gemini, BitStamp, and Galaxy Digital, following an investigation into Silvergate’s alleged participation in the collapse of FTX. The bank also announced the closure of its exchange network on March 3, stating that the decision was based on risk considerations.
Silvergate had established itself as a significant banking partner for several crypto companies. However, apprehensions about its financial stability arose when it announced a two-week delay in filing its annual 10-K report, which typically offers a summary of the company’s financial position.
The departure of Silvergate has left the potential impact on other crypto companies that have funds held by the bank or have exposure to it uncertain. The bank stated that the transfer volume of customer fiat deposits had decreased by approximately $50 billion in Q3 of 2022 compared to the corresponding period in 2021.
Debate over Silvergate’s downfall and the future of crypto banking
The collapse of Silvergate bank sparked a debate over who was responsible for the chain of events that led to its downfall. After the bank’s voluntary liquidation announcement, numerous reactions from lawmakers, crypto analysts, executives of crypto firms, and commentators appeared on social media.
Some lawmakers in the United States have seized the opportunity to comment on the crypto industry, characterizing it as a “risky, volatile sector” that poses a risk to the broader financial system.
Senator Elizabeth Warren has referred to Silvergate’s collapse as “disappointing but predictable,” urging regulators to take action against the risks associated with crypto.
Senator Sherrod Brown expressed his apprehension about banks that engage with cryptocurrencies. In his opinion, they pose a potential risk to the financial system.
The senator emphasized the need for robust safeguards to protect the financial system from the dangers associated with crypto. The senator’s comments have drawn criticism from some members of the community who argue that the issue was not caused by crypto but instead by fractional-reserve banking. They point out that Silvergate held considerably more in-demand deposits than cash reserves, which they believe was the primary factor behind the bank’s troubles.
Some companies have taken the opportunity to reaffirm their dissociation from the bank. Binance CEO Changpeng Zhao said on Twitter that the crypto exchange does not have any assets stored with Silvergate. Likewise, Coinbase issued a similar statement.
On the other hand, Nic Carter, the co-founder of Castle Island Ventures and Coin Metrics, a crypto intelligence firm, opined that the government was responsible for “accelerating the collapse” of Silvergate. Similarly, Ram Ahluwalia, the CEO of Lumida, a financial services company, shared a similar perspective, asserting that a letter from a senator had eroded public confidence in Silvergate, resulting in a bank run. He argued that the bank was denied due process.
Previously, Carter mentioned the existence of “Operation Choke Point 2.0.” He claimed that the U.S. government is utilizing the banking sector to orchestrate “a sophisticated and extensive crackdown on the crypto industry.”
However, some individuals think that the downfall of Silvergate might not necessarily have an adverse impact on the crypto industry. Instead, they believe that combined with proposed tax law changes, it could intensify the departure of crypto firms from the United States.
In the wake of Silvergate’s liquidation, there has been a growing concern about where crypto firms will turn to for their banking needs.
Coinbase, which previously accepted payments through Silvergate, announced on March 3 that it would be facilitating cash transactions for institutional clients using its other banking partner, Signature Bank.
However, Signature Bank had disclosed in December its intentions to lower its exposure to the crypto sector by decreasing deposits from clients holding digital assets.
In a bid to further diminish its crypto exposure, Signature imposed a minimum transaction limit of $100,000 on transactions processed through the SWIFT payment system on behalf of Binance.
The market is down
Given the liquidation of Silvergate Bank, the cryptocurrency market has experienced a decline. The other factors involved in this downfall include the lawsuit against KuCoin exchange, and comments from the United States Federal Reserve chair Jerome Powell that have worried investors.
Bitcoin is giving signs of a bearish future, and the crypto Twitter community talks of a potential bottom at $12,000. Ether has also experienced a decline.
The expectation of interest rate hikes and a softening economy weighs on risk assets, and Powell’s comments regarding a possible uptick in inflation have added to investor concerns.
The recent enforcement actions against Paxos and Binance and the SEC crackdown on centralized staking have also prevented the development of sustainable bullish momentum across the market.
The uncertainty regarding crypto regulation has led to market volatility, and the liquidation of Silvergate Bank is expected to make regulators keep an even closer eye on the sector.
Banks are already implementing robust anti-money laundering measures in preparation for further crypto regulation. While the crypto market had a strong start to 2023, investors’ appetite for risk is likely to remain muted until there is more transparency regarding the roadmap for crypto industry regulation and signs that U.S. inflation has peaked.