Silvergate may not be a systematic risk to the US banking system, but it could have a significant impact on cryptocurrency markets, multiple sources told Cointelegraph. Among them could be the increase in banking concentration in a few partners and the challenges for venture capital firms seeking to establish banking relationships in the country.
The bank was a network of cryptocurrency gateways for financial institutions and one of the main conversion ramps for cryptocurrencies in the United States until March 8, when its parent company, Silvergate Capital Corporation, made public its plans to “voluntarily liquidate.” assets and cease operations.
The move affects a “huge number of market makers and exchanges” who trusted the bank to process instant legit crypto transactions, explained Mark Lurie, CEO and co-founder of Shipyard Software, a decentralized development company. As Silvergate winds down its operations, the concentration of risk in the sector will also increase, as few banks continue to partner with cryptocurrency companies.
“I never would have thought that an FDIC-insured bank that is involved in the industry would fail. This is certainly a setback, and there will be implications that ripple through the entire digital asset industry for some time to come. I suspect it will be difficult for a while.” time for cryptocurrency companies to acquire banking relationships in the United States, given recent regulatory measures,” Charlie Shrem told Cointelegraph.
The bankruptcy of the FTX exchange caused major liquidity problems at Silvergate, although the bank had already been affected in early 2022 by the general crypto market crash. Fund outflows in the fourth quarter of last year resulted in a $1 billion net loss attributable to common stockholders. In the prior quarter, transfer volume on the Silvergate Exchange Network stood at $112.6 billion, a sharp drop of $50 billion compared to Q3 2021.
“The bank had attracted a large amount of cryptocurrency deposits, and as the effects of the FTX contagion began to kick in, banks faced a significant wave of withdrawals. This forced them to sell bonds, resulting in in material losses as interest rates have increased recently,” a spokesperson for Finery Markets explained, adding that:
“A downward spiral ensued with rapidly worsening capital adequacy ratios, leading more clients to withdraw funds. […] This could potentially mean some tendency for cryptocurrencies to move out of the US, at least until a more comprehensive regulatory framework is in place.”
The Silvergate bank run is said to be different from previous ones. “Unlike Luna and FTX, who tried to pass off their collapse as a run on the bank when in reality they were insolvent, the Silvergate situation looks like a real run on the bank. […] This is the difference between a bank run and fraud,” Lurie said.
Some believe that US authorities are discouraging banks from servicing the cryptocurrency sector, Cointelegraph reports. The alleged strategy consists of using “multiple agencies to inhibit banks from dealing with crypto companies, which would lead them to become completely unbanked.”
As banks cut ties with crypto companies, Binance announced in February a temporary suspension of US dollar bank transfers. Just weeks earlier, in January, the exchange said that its SWIFT transfer partner, Signature Bank, would only process transactions above $100,000.
Recent regulatory events were among the reasons Silvergate cited for ending its crypto banking business. However, repressive measures by US authorities against the sector may increase the number and quality of banking relationships with the crypto industry over time, according to Shrem:
“Looking ahead, I can’t help but be optimistic. This industry has grown by leaps and bounds, especially for as young as it is, and I remain confident that we are in the process of building a better and more equitable financial system in America. and the world”.
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