Crypto industry braces for impact with Silvergate exit

Silvergate may not pose a systematic risk for the U. S. banking system, but it could raise risks related to banking concentration and introduce new challenges for venture capital firms sources claim.

Silvergate is not a systematic risk for the United States banking system, but it could have a significant impact on the crypto markets, multiple sources told Cointelegraph. These may include increasing banking concentration in a few partners and challenges for venture capital firms seeking to establish banking relationships in the country.

The bank was a crypto-fiat gateway network for financial institutions and one of the major on-ramps for cryptocurrencies in the United States until March 8, when its parent company, Silvergate Capital Corporation, disclosed plans to “voluntarily liquidate” assets and shut down operations.

The move affects a “huge number of market markers and exchanges” that relied on the bank to process instant crypto-fiat transactions, explained Mark Lurie, CEO and co-founder of Shipyard Software, a decentralized development company. As Silvergate winds down operations, risk concentration in the industry would also increase, with few banks still partnering with crypto firms.

“When I got into Bitcoin back in 2011, I never would have thought that an FDIC-insured bank involved in the industry would actually fail. This is certainly a setback and there will be implications that will reverberate across the digital asset industry for some time. I suspect that it will be difficult for a while for crypto ventures to acquire banking relationships in the United States given the regulatory measures of late,” crypto mainstay Charlie Shrem told Cointelegraph.

Related: Gemini’s banking relationship with JPMorgan ‘remains intact’

Crypto exchange FTX’s collapse led to extensive liquidity problems at Silvergate, although the bank had already been affected earlier in 2022 by the downturn in crypto markets. Outflows in last year’s fourth quarter resulted in a $1 billion net loss attributable to common shareholders. In the previous quarter, the transfer volume on the Silvergate Exchange Network was at $112.6 billion, a $50 billion plummet compared to Q3 2021.

“The bank had attracted a lot of crypto deposits, and as knock-on effects of FTX contagion started to catch up, the banks faced substantial deposits’ outflow. This forced them to sell off bonds, resulting in material losses as interest rates increased recently,” explained a spokesperson from Finery Markets, adding that:

“A downward spiral ensued with rapidly worsening capital adequacy ratios, which led to more clients withdrawing funds. […] This could potentially mean a certain trend towards crypto moving outside the US, at least until a more comprehensive regulatory framework is established.”

The bank run on Silvergate was said to be different from previous failures within the space. “Unlike Luna and FTX, which tried to spin their collapse as a bank run when they were actually insolvent, the Silvergate situation seems like a genuine bank run. […] This is the distinction between a bank run and a fraud,” said Lurie. 

United States authorities are believed by some to be discouraging banks from offering services to the crypto industry, Cointelegraph reported. The alleged strategy consists of using “multiple agencies to inhibit banks from dealing with crypto firms, leading crypto businesses to become completely unbanked.

As banks sever relationships with crypto companies, Binance announced in February a temporary suspension of bank transfers of U.S. dollars. Just a few weeks before, in January, the crypto exchange said its SWIFT transfer partner, Signature Bank, would only process trades by users with U.S. dollar bank accounts over $100,000.

Recent regulatory developments were among the reasons mentioned by Silvergate to end its crypto banking business. The U.S. authorities’ crackdown on the industry, however, 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 leaps and bounds, especially for being as young as it is, and I’m still confident that we are in the process of building a better, more equitable financial system in the United States and globally.”