Silvergate failure: how bad is it for the market?

Silvergate Bank looks like it could be the next big cryptocurrency company to fail. Last week, the crypto-friendly lender delayed the publication of its annual financial report, citing the need to assess its ability to continue operating as a company. Since then, Silvergate shares have fallen 60%, while a growing number of exchanges — including Coinbase, Gemini and Bitstamp — have cut their financial ties with the bank, hoping to ward off any market concerns that could be exposed to contagion.

With Silvergate
now suspending its cryptocurrency payments network, the Silvergate Exchange Network, they have begun to mount serious concerns that it is only a matter of time before the creditor files for bankruptcy protection. The cryptocurrency market has already begun to react to this possibility, as its total limit has decreased by 6% since news of Silvergate’s difficulties spread.

If the bank fails, it would likely cause further losses, while there could be serious knock-on effects for the rest of the industry. This is not only in terms of falling prices, but also in terms of other banks willing to do business with cryptocurrency companies. However, it seems that most of Silvergate’s former clients had no trouble finding new banking partners, while it is questionable whether the market remains close to a fund, so larger price declines are unlikely.

Why Silvergate Bank is facing potential bankruptcy

Silvergate Bank has faced a number of financial challenges in recent months, which together could potentially bring it down. First of all, it suffered a wave of withdrawals in the wake of the FTX crash in November, with reports suggesting these withdrawals amounted to $8 billion.

To honor these levies, Silvergate had to sell about $5.2 billion in assets held, with a loss of about $718 million. It also secured a $4.3 billion loan from the Federal Home Loan Bank of San Francisco, which Silvergate had to repay early.

The repayment of this loan was obtained by Silvergate by selling even more of its assets, probably at another loss. As such, it found itself in a precarious financial position, as indicated by last week’s news that it is delaying the release of its annual results in order to assess its profitability. (He also had to repay $9.9 million to BlockFi’s creditors.)

In addition, it has
suspended its Silvergate exchange network, meaning it has effectively stopped doing business with crypto-exchanges and other related platforms. He says this is a “risk-based decision,” something that likely means he wants to assure all potential future creditors (if any) that he has stopped dealing with a volatile industry, namely crypto.

The effect on Crypto

In response to all this drama, cryptocurrency prices have taken a hit. Bitcoin (BTC) is down 5% since news of Silvergate’s problems broke, as is Ethereum (ETH) and numerous other major coins.

The price of Bitcoin in the last seven days. Via: CoinGecko

It is likely that their problems will only worsen if Silvergate actually files for bankruptcy. This is for two central reasons.

On the one hand, there could be considerable exposure to the bank within the broader cryptocurrency market and sector. A number of companies and platforms have already offered assurances that their exposure to the creditor under attack is minimal, but their protests cannot be taken as guarantees of anything.

In the case of MicroStrategy, for example, it has an outstanding loan of $205 million from Silvergate. He quickly moved to suggest that repaying this loan would not accelerate in the event of Silvergate’s bankruptcy, but his tweet on this met with some plausible questions.

This highlights the difficulties that the collapse of Silvergate could cause, with MicroStrategy owning more bitcoins (about 132,500) than any other publicly traded company. However, the bank’s crisis raises another big problem for cryptocurrencies, which is that it could make it harder for exchanges and other platforms to secure banking services in the future.

because? Well, because as commentators have pointed out, the nature and volatility of the cryptocurrency market means that providing banking services to crypto-exchanges can be very risky. Although it had no direct exposure to FTX, Silvergate suffered when its customers – the exchanges – demanded $8 billion in withdrawals after FTX’s crash. In turn, these exchanges required withdrawals because their clients – investors – were trying to get their money back during a sharp market downturn.

As Fintech lawyer Arturo Portilla noted on Twitter, banks can choose to refuse to do business with exchanges, while banks that already provide services to trading platforms can choose to stop doing so. This could make it extremely difficult for the industry and the market to operate.

In fact, some banks had already reduced their exposure to cryptocurrencies in recent weeks. Notably, Signature Bank announced in December that it would reduce its cryptocurrency-related deposits by $8 billion, to $10 billion. It also announced that it would cease processing fiat SWIFT transactions below $100,000 for individuals under $100,000, something that caused Kraken to stop using the bank earlier this month for some services.

This is significant because, in the wake of Silvergate’s issues, it seems that many exchanges are trying to switch to Signature. This includes Coinbase, but with the bank recently deciding to limit its cryptocurrency-related deposits, it’s questionable whether any exchange that left Silvergate could make the same move as Coinbase.

Crypto Weathers another winter

It is arguable that the damage of any eventual failure of Silvergate Bank has already been done, as the market has priced in a crash and that trading has already moved the banks. In fact, given that the overall market remains 64% below its all-time high of $3 trillion, it still remains fairly close to the bottom, even though it has recovered somewhat since the start of the year.

In other words, it’s arguable that there’s not much a failure can do at prices that recent news hasn’t already done. As for the issue of exchanges ensuring stable banking relationships, this is a thornier issue, especially in light of how the Federal Reserve and other regulators in the US have recently warned banks against cryptocurrency-related platforms and customers.

This is where regulation comes in. In the US, EU, and various other parts of the developed world, lawmakers are getting closer and closer to introducing comprehensive cryptocurrency legislation. While people within cryptography view regulation suspiciously, it is likely necessary if the industry is to be more sustainably and securely integrated into the broader global economy.

And make no mistake, such regulation is coming. This is why, although some exchanges may have difficulty securing banking services, legitimate ones will find it increasingly easy in the not-too-distant future. And with this development, the risk of fear-induced market recessions will be significantly lower.

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