Silvergate Capital Aftermath or Is This Just The Beginning?
Silvergate Capital Aftermath or Is This Just The Beginning?
Crypto payment infrastructures could be seriously jeopardize as a bank run on a San Diego bank will have implications across tech.
Wow, it has been a rough week. The buzzwords of the week include: “bank run, Silvergate, FDIC, crypto bank and FTX” which all showing up more and more in the media. I wanted to break down the Silvergate Capital situation and as I started writing this early in the week… another bank collapse on Friday - Silicon Valley Bank ($SIVB). This piece will be focused on Silvergate’s impact and insolvency but will also mention some about Silicon Valley Bank.
These institutions failed for similar but different reason and there are some connections worth looking. Read the sequel piece for the Silicon Valley Bank story here and remember that this is only just getting started. Buckle up, we are ready to launch…
At first glance, the board and management team do not seem to be responsible for something as blatantly criminal as the FTX team but we can’t currently assess all the damage. Some notable mentions from their board include persons with past experience at Andreessen Horowitz, regional banks, PwC and SPACs… of course.
So what was the killing blow for Silvergate? A bank run. This occurs when many clients withdrawn their money from a bank because they think the bank is going to be insolvent. This running for the door also causes panic and increases the chances of insolvency.
Overview
Let’s go over a quick summary of what the official statement was from Silvergate Capital:
Silvergate Capital Corporation Announces Intent to Wind Down Operations and Voluntarily Liquidate Silvergate Bank Company Considering How to Best Preserve Residual Value of its Assets
Silvergate Capital Corporation, the holding company for Silvergate Bank, has announced its intent to wind down operations and voluntarily liquidate the bank. The decision comes as a result of recent industry and regulatory developments, and the company believes that an orderly wind down and liquidation is the best path forward.
The bank's wind down and liquidation plan includes full repayment of all deposits, and the company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets. Silvergate Bank has also decided to discontinue the Silvergate Exchange Network (SEN), while all other deposit-related services remain operational as the company works through the wind down process.
The company has cautioned that there are significant risks and uncertainties associated with the wind down and liquidation process and that there may be important factors that could cause the company's actual results to differ materially from those indicated in its forward-looking statements.
Crypto Markets, Contagion & OTC Markets
More contagion risks are also inbound… enter Silicon Valley Bank ($SIVB) who had a similar bank run but it was mainly a business bank who services customers like Roku, Roblox and Circle (the USDC stablecoin issuer) which are all currently caught in the crossfire.
Crypto markets, hedge funds, OTC trading and how all of this ties together is through essential services that WERE provided by these banks. And now those services are in limbo and I expect the markets to also follow for the foreseeable future.
The collapse of Silvergate, one of the two regulated crypto banks in the US, has had a significant impact on the Over the Counter (OTC) crypto trading world, which constitutes the majority of actual crypto trading volume. OTC trades occur outside of open market exchange books and are broker-negotiated with high value to avoid affecting crypto prices.
The OTC market in the US heavily relies on the internal banking networks provided by Signature and Silvergate, which allow for 24/7 instant USD fiat transfers between participating accounts. These payment networks are also used for exchange arbitrage activity and stablecoin redemptions. Crypto hedge funds and stablecoin providers depend heavily on these networks to facilitate their trading activities.
The collapse of Silvergate has made institutional level trading extremely difficult and introduced a huge problem for the viability of stablecoins in the US, which may lead to the collapse of multiple crypto hedge funds. While this does not mean that crypto will completely collapse overnight, it has put a massive damper on future upward price action.
Who else is involved? FTX and Silvergate Capital were heavily involved and as the entire FTX empire came crumbling down. Primarily due to FTX exposure, Silvergate took $1 billion loss in Q4 of 2022.
Meanwhile, there are legitimate crypto businesses are also getting caught in the cross fire like Marathon Digital Crypto Mining ($MARA) which had to paid their debts with Silvergate early on Wednesday. MARA was actually one of the first to be proactive about this immediately.
For now, this is still a developing story so update will be added and dated. Only more contagion is inbound so it might be wise to buckle up and brace for a crash... whatever that means to you. Let me know if you had any corrections or comments on the story above and we can chat more about that.