Silvergate Bank, perhaps at one time the most important financial institution in crypto, will wind down after a period of cataclysmic withdrawals and a failed bailout from a federal mortgage backer. The bank’s conversations with the Federal Deposit Insurance Corp. last week, reported to be a way to avoid a shutdown and shore up liquidity, in retrospect look like the nail in the coffin rather than a sign of life.
Silvergate, which began during the savings-and-loan era and was the first bank to see an opportunity in crypto, essentially became a financial zombie after overgrowing itself in a volatile sector.
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It took on a massive amount of crypto deposits ($13.2 billion at the end of September) and, like all banks, invested those in safe yield-bearing assets like U.S. Treasurys and other bonds. Following the collapse of crypto exchange FTX, however, a wave of customer withdrawals and required payments on a Federal Home Loan Bank loan forced the bank to sell off assets before they reached maturity, causing a mismatch – it reportedly lost over $1 billion in the fourth quarter.
No lie, the situation isn’t great for crypto. Bitcoin (BTC) is trading down significantly on the news, and there are possible spillover effects to worry about. But this moment is also an opportunity for many. Who and what – apart from the short sellers who already made their profits – could benefit from Silvergate-gate? Here are four possible winners.
The companies that stand to benefit most directly from the collapse of Silvergate are Silvergate’s competitors. At the first sign of blood in the water a number of crypto firms including Coinbase (COIN), Paxos Trust and Galaxy Digital switched to New York-based Signature Bank (SBNY) out of “an abundance of caution.”
Signature, which had far less exposure to crypto than Silvergate did, announced some months ago that it would be curtailing its exposure to the crypto industry. There’s no denying, however, that many crypto companies are loaded with cash that needs to be banked somewhere. Even as banking industry overseers caution traditional-finance firms from dealing with crypto companies, crypto remains a well-capitalized industry on paper.
Bloomberg’s Matt Levine noted that Silvergate’s issues didn’t necessarily stem from crypto itself. The “run on the bank” didn't start with an implosion of Silvergate’s bitcoin loan book or of one of its crypto clients (well, FTX, but not as a proximate cause), but from “the normal business of banking, borrowing short (taking deposits from crypto firms) to lend long (buying Treasurys and munis),” he says.
There’s a calculus here involving regulatory concerns and risk, sure. But that’s exactly what due diligence is for. As long as it’s not explicitly illegal to bank crypto firms, and it’s not, there’s an opportunity for banks to filter out applicants that can operate as going concerns. The logical inverse is that nearly every crypto company is insolvent, which seems unlikely considering some $8 billion in deposits were withdrawn from Silvergate. That money has to go somewhere.
On Monday, Kaiko analysts reported that “stablecoins will likely become even more ubiquitous among traders,” with the “death” of the Silvergate Exchange Network, or SEN, an internal system Silvergate created to allow its clients to easily swap capital, which was shut down prior to the bank’s unwinding.
Crypto firms are likely already familiar with the mechanics of stablecoins, a class of crypto assets usually pegged to the U.S. dollar. In fact, in the last year, stablecoin transactions on centralized exchanges rose to 90% of all volumes from 79%, replacing in particular USD-based trading pairs, Conor Ryder, a research analyst at Kaiko, noted.
U.S. corporate stablecoin issuers are having problems of their own getting banking status, and many will be affected by Silvergate’s collapse. Issuers like Circle Internet Financial promise to hold an equivalent amount of assets to back the number of USDC in circulation, money that has to be parked somewhere. But for smaller firms, it’s possible a conversion from cash to stablecoins could hold them over.
Unlike the U.S., the European Union has been taking a proactive view toward regulating the crypto economy. The pending Market in Crypto-Assets, or MiCA, law is a broad set of rules expected to go into effect soon, providing clarity for both crypto companies and financial institutions that would serve them. The crypto problems in the U.S. could only catalyze the trend of firms looking overseas to set up shop.
One indication of that, perhaps, as Ryder noted, is that “the BTC-Euro pair hit its highest level of market share vs. [USD] ever last week, nearly tripling in market share in the space of a few weeks.”
On Monday, Oliver von Landsberg-Sadie, CEO of crypto financial-services firm BCB Group, told CoinDesk’s Ian Allison that his company’s payments processor is accelerating plans to add U.S. dollar capabilities to help fill the hole left by SEN. BCB launched its real-time settlement network, the BCB Liquidity Interchange Network Consortium, or BLINC, in mid-2020. It currently handles euros, British pounds and Swiss francs. Institutions like BCB, which provide an on-ramp into crypto for banks, could become increasingly valuable as a way to absorb some of the risks.
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