Silvergate collapse: What does it mean for crypto?

We need to talk about Silvergate. Silvergate was a crypto focused bank with $13 billion of assets under management just last year. And now it has collapsed. What happened? What does this mean for crypto and what does this guy have to do with it? We are going to cover all this in this video. Before we start, don't forget to hit the like button and subscribe to our channel. I'm Giovanni, your host and this is a Cointelegraph report. On March 9, 2023, Silvergate's parent company announced it was shutting down operations and liquidating the bank. The announcement didn't come as a surprise. A few days earlier, Silvergate released a statement that raised concerns about its financial health. As a result, the company's shares crashed by more than 50% in hours. Its main clients, including Coinbase, Galaxy Digital, Crypto.com and Paxos, suspended all operations with the bank. We've all seen similar meltdowns in crypto before, but never with a fully regulated U.S. bank. The consequences of this are for now unknown. But why should you care? You may be asking. Silvergate was among the very few crypto friendly banks in the United States. It was a bridge connecting the crypto industry with the dollar system. Purchasing crypto with dollars would be pretty difficult without the on and off ramp services banks provide. So what exactly happened to Silvergate? To understand that, we must take a step back and look at Silvergate's background. Silvergate was founded in 1988 in La Jolla, California. It was one of the first regulated financial institutions to provide banking services to crypto companies as soon as 2013. But how exactly does a crypto bank work? Basically, when you send your dollars to a crypto exchange to buy crypto, the exchange puts them in a deposit account in a crypto bank like Silvergate. Also, stablecoin issuers need a bank to store their fiat reserves so that they can keep backing their stablecoin at a 1,1 ratio. There are very few banks offering these types of services in the United States. That is why Silvergate attracted a lot of deposits over the last few years. At the end of September 2022, Silver Silvergate had about $13 billion in deposits, almost all of which were from crypto companies. Among its clients were major crypto exchanges, including the now infamous ftx. You can probably see where this is going. When FTX collapsed in November 2022, it was a major blow for Silvergate. Panicked investors rushed to withdraw their funds from FTX and other exchanges. In turn, exchanges had to withdraw cash deposits from Silvergate. And to meet customers requests. Basically a good old fashioned bank run. Now, as it usually happens with bank runs, Silvergate did not have enough cash available to meet all these sudden withdrawal requests. So the bank had to sell about $6 billion worth of its equity portfolio at a loss. As a result, Silvergate lost about $1 billion in the last quarter of 2022. By the end of December, the bank's non interest bearing deposits were down to $3.9 billion. Since then, things have gone downhill pretty quickly. Silvergate had to sell more of its security portfolio in January and February, suffering additional losses. To worsen the situation, the bank was also facing a Probe by the U.S. department of justice for ties to FTX and Sambag Manfred. Earlier this month, the bank suspended its flagship product, the Silvergate Exchange Network, which allowed its clients to make fiat transfers to 24,7. That sounded like a death sentence for the bank. So what now? Well, the collapse of Silvergate marks the very first time a traditional bank goes under following a crypto market crash. That sets a poor precedent, especially considering the current regulatory climate in the U.S. earlier this year, U.S. banking regulators issued a warning to banks dissuading them from serving crypto customers. This event is likely to reinforce the regulators argument that crypto threatens the stability of the traditional financial system. That assessment is questionable, to say the least. Silvergate's collapse was mainly the result of poor risk management and not an inherent crypto problem. As Custodian bank founder Katelyn Long pointed out, if Silvergate held all of its reserves in cash, it would have survived the bank run, avoiding the losses that eventually brought it down. In any case, the Silvergate collapse is likely to put even more pressure on other US banks to stay away from crypto. That process has already started. Signature Bank, Silvergate's only competitor in the US Announced it was reducing its exposure to crypto. In a worst case scenario, crypto exchanges may lose access to banking services in the US that would make it far more difficult to buy and sell crypto with dollars, but no need to panic. Such immediate and widespread legislation is unlikely. And even in this worst case scenario, crypto users will still be able to buy and trade crypto by using peer to peer services. As Bitcoin proponent Samson Mao pointed out in a recent tweet, China has a vibrant crypto trading ecosystem despite the fact that the country de facto banned crypto exchanges in 2021. After all, crypto is a global and decentralized industry. It has resisted multiple crises and and will likely survive Silvergate 2. That's it for this week's video. Thanks for watching and if you enjoyed the content, don't forget to like and subscribe. Also, let us know in the comments what you think will be the impact of the Silvergate crisis. I'm Giovanni, your host. See you next time.