Banks are the lifeblood of the country’s economic system, and every bank failure is worrisome. There were two failures last week. On March 8, Silvergate Capital – a cryptocurrency-focused banking company – entered voluntary liquidation. On March 10, US regulators closed down and seized the deposits of the technology-oriented Silicon Valley Bank in what was called the second largest bankruptcy in US history. Both California institutions fell victim to bank deposit runs.
The impact of the collapse of the Silicon Valley Bank (SVB) could be significant, although it is too early to tell. Stablecoins like USD Coin (USDC) and Dai (DAI) losing their ties to the dollar are never a good sign, but by Sunday March 12 they were back to normal. However, the Silvergate Bank debacle is unlikely to cause long-term damage to the crypto sector.
The collapse of the San Diego-based Federal Reserve member bank should be a minor event compared to the earthquake triggered by FTX’s bankruptcy in November 2022, Cointelegraph sources said. The FTX implosion destroyed dozens of crypto companies, including Silvergate Bank. In comparison, the effects of bank liquidation should be more limited. It may even provide valuable lessons on diversification, a fundamental principle of risk management that seems to be forgotten when markets are rising sharply.
There will likely be short-term repercussions that will likely make the lives of crypto companies harder and more expensive to find banking services in the United States. And not only the United States is experiencing some turmoil.
In Latin America, which is primarily a cryptocurrency (FX) market, where many companies buy stablecoins such as USDC and Tether (USDT) to send funds overseas, “Silvergate’s fallout has been problematic,” said Thiago César, CEO fiat. Ramp service provider Transfero Group told Cointelegraph.
“Most crypto exchanges have lost their US dollar queues.[…] This has affected the cryptocurrency-driven alternative currency market at LATAM.” Local Brazilian dealers at USDT and USDC suddenly couldn’t replenish their stocks, César reported. (This interview was conducted before the SVB seizure, which further shook some stablecoin companies.)
Josh Olszewicz, head of research at Valkyrie Digital Asset Management, told Cointelegraph: “The lack of inputs and outputs, as well as the general banking needs of consumers and companies interacting with the crypto industry, could be hampered in the near term.” Coinbase, Paxos, Gemini, Bitstamp and Galaxy Digital, among others, have used Silvergate as a banking partner.
That said, Silvergate’s demise likely poses no long-term obstacles. “Basically, a bank’s exit from the crypto industry does not harm any blockchain, including Bitcoin,” added Olszewicz.
Joseph Silvia, a partner at law firm Dickinson Wright – and former advisor to the Federal Reserve Bank of Chicago – sees the liquidation of Silvergate Bank more as a “cautionary” than a harbinger of tougher times for the crypto sector. The bank was insufficiently diversified and dependent on the crypto industry for its deposits. Similarly, Silicon Valley Bank was probably too focused on tech-based venture capital firms. In both cases, the trickle of customer deposits quickly turned into a torrent.
More than 90% of Silvergate’s deposits came from cryptocurrency companies, and after the FTX implosion in November, nervous investors withdrew those deposits in a classic bank panic. This activity did not go unnoticed by US banking regulators. The Federal Reserve and the Office of the Comptroller of the Currency issued a joint statement in February warning banking organizations of “liquidity risks” as a result of “cryptocurrency market vulnerabilities.”
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In the aftermath of Silvergate’s liquidation, some traditional banks may now shut down their doors to crypto accounts altogether, while others may severely limit accepting crypto deposits, Silvia said. This is likely to increase costs for US crypto companies as their banking options become more limited.
In addition to being too focused on one sector of high-risk industry, Silvergate may have invested in the wrong assets. As Austin Campbell, an assistant professor at Columbia Business School and managing partner of Zero Knowledge Consulting, told Cointelegraph, “Basically, you either want a highly diversified deposit base if you have assets with longer maturities because you can’t easily get through the round and need diversification, or if you’re very concentrated, you should have an asset base of much shorter duration so that you can easily liquidate in the event of a massive pullback.” Campbell added:
“Silvergate was highly concentrated and held securities with longer maturities. You can’t do both. You must choose one. They would be fine if they were so focused if they didn’t extend the duration on the asset side.
Campbell does not believe that the collapse of Silvergate will have the same consequences for the crypto sector as the collapse of FTX – nor will it even have a major impact on the broader banking industry. Silvergate’s assets at the end of 2022 totaled $11.4 billion, which is average by US bank standards.
By comparison, JPMorgan Chase’s year-end balance sheet assets totaled $3.66 trillion, more than 300 times that amount. SVB, with $209 billion in assets, falls somewhere in the middle. Silvergate is “the definition of a small problem” from a mainstream banking perspective, noted Campbell, who said:
“For cryptocurrencies, FTX has been a big problem not only because of the volume, but also because of the staggering depth of fraud and mismanagement. Silvergate seems to have just broken the asset-liability match, a perennial problem in banking. It wasn’t that the CEO was stealing billions from customers.”
“FTX was a much bigger issue,” agreed Justin d’Anethan, director of institutional sales at Amber Group, a Singapore-based digital asset firm. D’Anethan added: “Countless entities have been funded, traded, held, earned and borrowed by the FTX exchange or Alameda fund. It has spilled over the entire crypto space.”
Silvergate may affect the US, but still leaves cryptocurrencies behind [firms] with many alternatives and substitutes and, if any, an impetus for greater decentralization,” continued d’Anethan. In the short term, “other crypto-friendly banks like BCB, Prime Trust, SEBA” offer on-ramp/off-ramp and FX conversions. “Of course, for mainstream or institutional adoption, fiat railroads are needed for fresh capital to enter the crypto markets. But at the moment there is no indication that we will miss them.”
Others have suggested that US regulators intend to scare traditional banks from doing business with cryptocurrency exchanges. Will this see crypto companies move out of the US and users shift to peer-to-peer transactions like in China, as recently suggested by Samson Mow?
Silvergate is falling and stock exchanges losing banking are not affected #Bitcoins. The demise of fiat banking on exchanges will simply mean P2P buying/trading.
Just like in China. There is still a solid P2P trading ecosystem without exchanges.
— Samson Mow (@Excellion) March 3, 2023
“I think many US-based companies already have or are in the process of looking for overseas solutions. This will benefit jurisdictions that are more crypto-friendly. I’m thinking Dubai, Singapore, Hong Kong, maybe the UK or Switzerland,” d’Anethan said, adding:
“For retail, if it’s based in the US, it’s going to be more difficult. Ironically, in order to protect retail investors, regulators can prevent them from coming into contact with an industry that, if history is any guide, is constantly evolving and gaining ground around the world.”
Valkyrie’s Olszewicz even saw a positive outcome should the US finally get some sensible crypto regulation. “Potentially, as digital asset companies and exchanges become more regulated, larger traditional banks may be more open to establishing relationships with digital asset entities. If not, yes, more and more companies and capital will move overseas as cryptocurrencies are not going to disappear any time soon.”
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“I think the long-term impact will be to move banking relationships elsewhere, and in the positive case, it will become both more diverse and more resilient,” said Campbell of Columbia Business School. “However, US regulators are going in the other direction and are taking it as an example that crypto is a problem – it is not, poor risk management was – so this could also force crypto to build stronger banking relationships in both Asia and Europe, especially after MiCA [Market in Crypto-Assets] world.”
Or just growing pains?
Greater regulatory clarity around cryptocurrencies and blockchain technology would help, suggested Silvia of Dickinson Wright. At some point, US regulators may become more explicit in their advisory statements — for example, warning banks that if they accept crypto deposits, the total cannot exceed 5% of total liabilities. In the meantime, crypto deposits remain a liquidity risk, added Silvia. “They’re not as sticky as traditional deposits.”
Some US crypto companies may need to find new banks, while traditional banks may be more reluctant to accept cryptocurrency-related deposits — at least for now. But the nascent crypto industry is not going anywhere, added Silvia, who sees the current turmoil as a growing pain. At this stage, it is probably necessary to eliminate the bad actors. That said, the crypto sector remains “an interesting value proposition,” said Cointelegraph.