silver gatea bank that has become a major player in the cryptocurrency sector is facing problems that could affect the entire industry.
Although the company started in the real estate market, it entered the cryptocurrency market in 2014 and has since become a key partner for other companies in the industry, including Coinbase, Gemini and Krakenthe largest brokers in the US.
The bank was hit hard by the collapse of FTX, which resulted in an $8.1 billion run on withdrawals, and its financial condition deteriorated further in the last quarter, with a loss of $1 billion.
Last Wednesday (1), Silvergate filed a surprise regulatory filing, saying the results were worse than previously reported. The result is that the Coinbase, Galaxy Digital, Crypto.com, Circle and Paxos announced that they would stop using the bank’s services, like other lesser-known clients.
Silvergate’s problems are troubling because few banks are willing to get involved in cryptocurrencies because of the risks involved. In addition, most traditional banks do not allow their customers to transact in USD 24 hours a day, 7 days a week.
So access to the bank that moves with the pace of cryptocurrencies is rare, and if Silvergate fails, it could push funds and market makers to other countries, eroding liquidity and making transactions more difficult.
Cryptocurrency-friendly banking crisis
The collapse of cryptocurrency exchange FTX last November raised concerns about the impact the bankruptcy of a major cryptocurrency company could have on the entire industry.
One of the most affected was Silvergate, a California-based bank that has established itself as the backbone of the cryptocurrency market.
Silvergate relies on customer deposits to operate, and about 90% of its deposit base came from crypto companies using its financial services.
When FTX went bankrupt and the cryptocurrency market went into a slump, Silvergate immediately suffered a loss of $8.1 billion in deposits. The bank has seen a 95% drop in the price of its shares since August, which are now valued at about $6.
While the bank’s CEO, Alan Lane, stated that the bank’s mission has not changed, it was clear that its cryptocurrency-focused strategy was at risk.
Last Wednesday, Silvergate announced it would not be able to file its annual report with the Securities and Exchange Commission on time, citing the need to reassess its business strategy and ability to continue operating.
As a result, several of the largest cryptocurrency companies announced that they were cutting back or cutting off their relationships with the bank.
Rumors that the Federal Deposit Insurance Corporation (FDIC) could declare Silvergate bankrupt were circulating among investors, with the possibility that another bank, possibly Wells Fargo, could acquire Silvergate or take over its deposits.
Joseph Silvia, a former executive of the Federal Reserve Bank of Chicago, said the Silvergate situation is a wake-up call for the industry, but there are still opportunities in the cryptocurrency market.
New crash in the cryptocurrency market
The cryptocurrency industry is facing another setback with the collapse of Silvergate, with many companies relying on the bank to accept deposits. Moreover, the effects of Silvergate’s collapse are not only being felt by the bank.
The cryptocurrency industry as a whole faces difficulties in obtaining banking services, a critical need to maintain liquidity and financial stability.
The other companies that offer banking services in the sector, such as Metropolitan and Signature, already moved away from cryptocurrencies before the Silvergate debacle. Now it is even more difficult for cryptocurrency companies to obtain reliable and secure banking services.
Silvergate was a gateway bank for cryptocurrencies and held no reserves and paid no interest. The problem is that brokers will suffer a huge loss of deposits and it will be even more difficult for them to get banking services.
While many banks were reluctant to partner with cryptocurrency companies, Silvergate jumped at the opportunity and experienced tremendous growth between November 2019 and November 2021, serving more than 1,500 digital asset and fintech companies by the end of 2022 .
However, the crashes in the cryptocurrency market also left the bank unable to rely on the capital markets for funding, leading the company to reveal last week that it was not doing well financially.
Silvergate is still operating, but is struggling financially. It must meet certain capital requirements or sell itself to another bank. If you fail to meet these requirements, you may receive a notice of corrective action from the FDIC and other regulatory agencies.
The FDIC can take over the bank at any time if it is in more acute financial difficulties. While Wells Fargo is rumored to be a candidate to buy Silvergate, speculation is uncertain.
In short, the cryptocurrency industry still desperately needs banks to function, and Silvergate’s bankruptcy could make it even more difficult for crypto companies to obtain banking services.
It is unclear whether Silvergate will be able to overcome this situation. But it is certain that the cryptocurrency industry has become more fragile and unstable. The search for safe and reliable financial solutions remains a major challenge for the sector.
Source: Live Coins
Barry Siefert is an accomplished journalist and author at The Nation View. He is known for his expertise in the field of cryptocurrency, and has written extensively on the topic. With a background in finance and economics, Barry has a deep understanding of the underlying technology and market forces that drive the crypto industry.
