• News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
  • News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
No Result
View All Result
Home Articles

Silvergate Bank’s Exit: A Turning Point for Crypto Banking?

28 March 2023
in Articles, Explainers, Opinion
Reading Time: 8 mins read
106 2
Silvergate-Bank's-Exit-A-Turning-Point-for-Crypto-Banking

Contents

  • An Overview of Silvergate Bank’s Relationship With The Crypto Industry
  • What Exactly Happened to Silvergate Bank?
    • Why Silvergate Bank’s Crash Different From Other Failures in the Crypto Industry
    • Similarities Between the Collapse of Silvergate Bank and Silicon Valley Bank
  • Potential Impacts of Silvergate Bank’s Failure on the Crypto Industry
  • Lessons Learned From Silvergate Bank Crash
    • Importance of Risk Management
    • Need for Oversight and Accountability
  • The Next Steps for Silvergate Bank
  • Silvergate Bank, a former crypto-friendly bank, suffered significant liquidity problems due to the decline in cryptocurrency markets in 2022 and the collapse of the crypto exchange FTX. 
  • These events led to a significant outflow of funds, resulting in a $1 billion net loss for common shareholders during the last quarter of 2022. 
  • The bank compensated for the loss by selling its bonds, which became expensive due to increased interest rates. 
  • Silvergate Bank has decided to discontinue its crypto banking operations, citing recent regulatory changes as one of the reasons for the decision.
  • However, the U.S. government’s crackdown on the crypto industry may result in more banking partnerships in the future. These partnerships could be of better quality and quantity.

Since FTX went out of business, several crypto companies and cryptocurrency markets have been badly affected, and Silvergate is the latest victim. Silvergate announced a loss of over $1 billion and an $8 billion run on deposits, which caused investors to lose trust in the bank.

The holding company for Silvergate Bank, Silvergate Capital Corporation, stated that the best course of action is to orderly wind down the bank’s operations and voluntarily liquidate the bank.

The fall of Silvergate is a rare occurrence of cryptocurrency volatility impacting traditional banking. Despite being a traditional, federally insured institution, the bank had established itself as a point of entry into the world of digital assets.

In this article, we delve into the events that contributed to Silvergate bank’s downfall and discuss how this collapse will impact the crypto banking sector. Furthermore, we will examine the key takeaways from this incident and what lies ahead for both the bank and the industry as a whole.

An Overview of Silvergate Bank’s Relationship With The Crypto Industry

Silvergate Bank was initially established in 1988 in San Diego, California, as a small local bank. However, it grew to become a major financial service provider to the cryptocurrency industry.

As early as the 2010s, Silvergate Bank began offering banking services to cryptocurrency exchanges such as Coinbase and Kraken, making it one of the pioneers in providing financial services to the emerging digital currency sector.

In 2013, the bank introduced the Silvergate Exchange Network (SEN), which allowed customers to transfer U.S. dollars between exchanges around the clock. The SEN platform revolutionized the digital currency industry by providing a fast and affordable way to transfer money between exchanges.

In 2018, Silvergate Bank became the first American bank to go public, raising $40 million from its IPO. The bank used the funds to expand its services to cryptocurrency clients.

What Exactly Happened to Silvergate Bank?

Silvergate Capital created a crucial infrastructure for the cryptocurrency ecosystem by establishing a payment network capable of swiftly clearing and settling fiat transactions between two parties on the network at all times. Institutional traders and crypto exchanges liked the network because crypto trades happen all the time, which is different from the U.S. financial system.

However, after the FTX crash, things started going downhill at Silvergate. Concerns over whether Silvergate may face regulatory action for its relationship with FTX, a significant client of Silvergate’s, caused a crisis of trust inside the bank. The U.S. Department of Justice also began investigating the bank.

In the fourth quarter of 2022, almost 70% of Silvergate’s deposits left the bank. This forced the company to sell a large part of its bond portfolio at a loss and took away a large amount of shareholder equity. Most bonds now have negative yields due to rising interest rates.

In the most recent quarter, more bonds were sold, which led to more losses and could have put the bank below the capital ratios required by regulators, thereby making Silvergate delay sending its annual report to the Securities and Exchange Commission. The bank added that it was unsure about its capacity to carry on.

When Silvergate suddenly shut down its payments network, it looked like the bank, which had once been seen as a very promising company and stock, was almost dead.

Why Silvergate Bank’s Crash Different From Other Failures in the Crypto Industry

In contrast to Luna and FTX‘s crashes, which were caused by depegging and financial mismanagement, the situation with Silvergate appears to be a genuine bank run.

After the collapse of FTX, digital asset deposits decreased significantly, prompting Silvergate to adopt policies to withstand bank runs. This included cost-cutting measures, such as reducing its workforce by around 40%, reviewing its product offerings and customer relationships, and adjusting expenses. 

Despite these efforts, the management team realized their policies were insufficient to maintain deposit safety and accessibility. The team had structured their balance sheet to withstand a 70% drawdown on deposits and kept cash reserves that exceeded all remaining deposits. However, the outcome shows that these efforts were insufficient as the bank suffered from a bank run.

Similarities Between the Collapse of Silvergate Bank and Silicon Valley Bank

Both banks were hit hard by a wave of withdrawals that led them to sell securities that had been kept as reserves. These multibillion-dollar sales resulted in substantial write-downs because the value of their portfolios had decreased due to rising interest rates.

When rates go up, bond prices tend to go down, and this is what happened because the Federal Reserve has been raising interest rates in a bid to tame inflation. Consequently, this led to big losses for the banks. 

The failure of these two banks has increased uncertainty in the financial sector and created a significant obstacle for the cryptocurrency business, as financial ties are essential for crypto firms to maintain their infrastructure and operations. These implications are far-reaching and are likely to persist in the future. 

Potential Impacts of Silvergate Bank’s Failure on the Crypto Industry

The collapse of Silvergate Bank was a significant event for the crypto industry because it was one of the few banks in the U.S. that supported cryptocurrencies. When the news broke, the price of Bitcoin dropped by 6%, indicating that the markets were preparing for potential repercussions.

This collapse raises concerns that crypto businesses may move to less regulated banks, increasing risks for all parties involved. If they cannot find a bank willing to work with them, they might resort to one that does not adhere to the rules.

In the short term, U.S. banks are expected to start limiting their exposure to cryptocurrency clients, and some have already begun the process. Signature, another bank known for supporting cryptocurrencies, has stated that it could lose up to $10 billion in deposits from crypto businesses.

To continue operating, crypto companies may choose to work with foreign financial institutions that support cryptocurrencies, such as Bahamas Deltec, Capital Union Bank, Fidor Bank, Sygnum, SEBA, Striga, and Revolut. However, the failure of Silvergate will likely attract scrutiny from regulators, who may impose strict restrictions on banks doing business with cryptocurrency startups.

In the long run, new or existing banks capable of accommodating more crypto clients without jeopardizing their diversification may step in to fill the void left by retracting banks.

Lessons Learned From Silvergate Bank Crash

Importance of Risk Management

Silvergate Bank’s failure emphasizes how crucial risk management is to the financial sector. Good risk management is essential for averting disasters, but it also aids in decision-making, trust-building among stakeholders, and fostering a culture of awareness and accountability. So, to ensure their long-term success, financial institutions must prioritize risk management and make the necessary investments in both resources and strategy.

Need for Oversight and Accountability

Oversight and accountability are crucial to ensure that the banking sector operates securely and ethically as it benefits clients and other stakeholders. Without proper supervision and accountability, the risk increases, and the trust decreases, leading to negative impacts on the financial institution and the economy as a whole.

To prevent such situations, the industry must prioritize oversight and accountability through regulatory monitoring, risk management strategies, and transparent reporting procedures. The goal should be establishing a reliable and secure banking system that all parties can trust.

The Next Steps for Silvergate Bank

Silvergate Bank has announced its plans to liquidate its assets according to regulatory procedures while also exploring options to resolve claims and preserve the residual value of its assets. 

The bank’s proprietary technology and tax assets are among the assets to be liquidated. The Silvergate Exchange Network, which facilitated the transfer of funds among financial institutions, including Kraken, Gemini, and Coinbase, has already been shut down this month.

Several companies, including Coinbase, Crypto.com, and Paxos, have begun distancing themselves from Silvergate Bank, and even Tether has done the same. The bank had few supporters, and its role in the FTX meltdown is under scrutiny by the government.

It remains to be seen how the collapse of Silvergate Bank will impact liquidity in the crypto ecosystem, given that its payments network facilitated over $1 trillion in transactions. Additionally, the bank’s collapse is likely to attract attention from lawmakers who are concerned about the spread of crypto risks to the traditional financial sector.

 

If you would like to read more articles like this, visit DeFi Planet and follow us on Twitter, LinkedIn, Facebook, and Instagram, and CoinMarketCap Community.

“Take control of your crypto portfolio with MARKETS PRO, DeFi Planet’s suite of analytics tools.”

Don't miss out!

Subscribe To Our Newsletter

Receive top education news, lesson ideas, teaching tips and more!
Invalid email address
Give it a try. You can unsubscribe at any time.
Thanks for subscribing!
Tags: Silvergate
Share63Tweet40Share11
Previous Post

Introducing StepN: The Web3 Lifestyle App That Pays for Exercising

Next Post

The Complete Guide to Investing in Cryptocurrency Index Funds

Adedamola Ojedokun

Adedamola Ojedokun

Related Posts

CurveFi’s-CrvUSD-Stablecoin-All-you-need-to-know
Articles

CurveFi’s CrvUSD Stablecoin: All You Need To Know

24 May 2023

Introduction Stablecoins, with a market valued at an impressive $130 billion, have become a vital tool in DeFi to safeguard against market volatility and the risks of traditional finance. However, most stablecoins available today are centralized and prone to...

Careers-In-Cryptocurrency-How-To-Land-Your-First-Crypto Job
Articles

Careers In Cryptocurrency: How To Land Your First Crypto Job

23 May 2023

Introduction If there's one thing everyone can agree on, it's that "cryptocurrency" is no longer just a buzzword. In a remarkable feat, it has become the fastest tech product and industry to hit the trillion-dollar mark, achieving this milestone...

Popular-NFT-marketplaces-and-what-they-offer
Articles

Popular NFT Marketplaces And What They Offer

19 May 2023

Introduction The NFT market is predicted to grow to a valuation of $211.72 billion by 2030, demonstrating the enormous potential for wealth creation through this innovative concept. The sector's current valuation of $10 billion, as well as the estimated...

The-AI-Renaissance-How-Generative-AI-is-Shaping-the-Future-of-Technology
Articles

The AI Renaissance: How Generative AI is Shaping the Future of Technology

17 May 2023

TL;DR Generative AI is a form of artificial intelligence that uses machine learning to analyze large datasets and create new content.  This advancement has transformed the creative process by enabling the creation of unprecedented and distinct content in previously...

Swap Crypto

Markets Update

DOGE Hits $10B Market Cap; Community Criticizes New Twitter CEO Appointment

1 week ago

NFT Market in Q1 2023: A Tale of Strong Starts, Mixed Performances, and Shifting Market Dynamics

2 weeks ago

Pepe Coin Makes Impressive Market Debut, Surpasses Shiba Inu and Dogecoin in Market Capitalization

3 weeks ago

Litecoin (LTC) Retraces After Hitting $100: Can LTC Halving Lead to New ATH?

4 weeks ago

Bitcoin Shows Potential to Reach $30,000 Amid Volatile Market Conditions

4 weeks ago

XRP Fluctuates As Ripple-SEC Case Nears Conclusion and Regulatory Pressures Mount

1 month ago
Read More

Spotlight

All about SolChicks

All about Algorand

All about Bitcoin

All about Goracle

Press Releases

BitMEX Introduces a New PnL Realisation Feature for More Capital-Efficient Cross-Margining

BitMEX Introduces a New PnL Realization Feature

byGuest Author
13 April 2023
0

...

BitMEX Joins TRUST Protocol to Expand Travel Rule Compliance Capabilities, Aims to Adapt Swiftly in an Evolving Landscape

BitMEX Joins TRUST Protocol to Expand Travel Rule Compliance Capabilities

byGuest Author
13 April 2023
0

...

Vybe Launches Bntyhntr: A Digitalized Treasure Hunt Product on the Algorand Chain

Vybe Launches Bntyhntr: A Digitalized Treasure Hunt Product on the Algorand Chain

byGuest Author
25 January 2023
0

...

BetDEX-Exchange-to-Launch-on-Solana-Mainnet-Ahead-of-2022-FIFA-World-Cup.jpg

BetDEX Exchange to Launch on Solana Mainnet Ahead of 2022 FIFA World Cup

byGuest Author
8 November 2022
0

...

BetDEX-Exchange-Becomes-First-Fully-Licensed-Sports-Betting-Exchange-on-Blockchain.jpg

BetDEX Exchange Becomes First Fully-Licensed Sports Betting Exchange on Blockchain

byGuest Author
1 November 2022
0

...

Read More
  • About Us
  • The Team
  • Careers
  • Contact
  • Partnerships

© Copyright 2023 DeFi Planet   |   Terms & Conditions   |   Privacy Policy

No Result
View All Result
  • News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In
  • bitcoinBitcoin(BTC)$27,596.003.05%
    BITCOIN
    24H : 3.05%
    Volume : $8,080,661,837.00
    Marketcap : $535,046,207,989.00
  • ethereumEthereum(ETH)$1,856.141.55%
    ETHEREUM
    24H : 1.55%
    Volume : $5,783,010,853.00
    Marketcap : $223,280,575,109.00
  • tetherTether(USDT)$1.000-0.04%
    TETHER
    24H : -0.04%
    Volume : $16,629,377,782.00
    Marketcap : $83,229,156,017.00
  • binancecoinBNB(BNB)$309.241.08%
    BNB
    24H : 1.08%
    Volume : $479,793,555.00
    Marketcap : $48,857,096,065.00
  • usd-coinUSD Coin(USDC)$1.0000.030%
    USD COIN
    24H : 0.030%
    Volume : $3,182,752,964.00
    Marketcap : $29,080,609,248.00
  • rippleXRP(XRP)$0.4791.48%
    XRP
    24H : 1.48%
    Volume : $620,553,727.00
    Marketcap : $24,908,411,727.00
  • cardanoCardano(ADA)$0.3782.99%
    CARDANO
    24H : 2.99%
    Volume : $213,580,166.00
    Marketcap : $13,247,573,637.00
  • staked-etherLido Staked Ether(STETH)$1,856.131.65%
    LIDO STAKED ETHER
    24H : 1.65%
    Volume : $14,837,465.00
    Marketcap : $12,644,904,742.00
  • dogecoinDogecoin(DOGE)$0.0731.43%
    DOGECOIN
    24H : 1.43%
    Volume : $233,851,033.00
    Marketcap : $10,185,213,106.00
  • matic-networkPolygon(MATIC)$0.9311.11%
    POLYGON
    24H : 1.11%
    Volume : $196,048,858.00
    Marketcap : $8,648,692,436.00

Add New Playlist

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?
-
00:00
00:00

Queue

Update Required Flash plugin
-
00:00
00:00