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A new danger 🌩️ is looming over the crypto markets and even threatening to send the nascent crypto spring back into the cold temperatures.

This danger’s name is Silvergate, and it is a crypto-friendly US bank that is going through difficult times. Its fate has become important for the crypto markets because it could shape future regulations ⚖️ for all banks working with crypto companies, and, knowing how crypto-sceptic most regulators still are, this could be troublesome for the entire crypto industry.

So let’s take a look at what happened to Silvergate, what consequences this could entail, and how can we avoid the worst-case scenario.

What is happening to Silvergate?

The bear market has taken its toll on many crypto companies, which found themselves in the need of cash and started to withdraw their money from the banks. The companies in question are mostly CeFi firms – traditionally managed finance companies that work with crypto, often on behalf of their clients (exchanges, hedge funds, crypto asset managers…)

1.       These companies, which composed the core of Silvergate’s client base ($12 billion of the total $13.2 billion of deposits), have withdrawn over $8 billion in deposits in the last three months of 2022;

2.       To cope with the withdrawals, the bank started to sell its debt securities (bonds, mortgage-backed securities, T-bills…), often at a loss;

3.       A $1 billion loss was registered for the Q4 2022;

4.       Last week, Silvergate announced it was selling additional securities and expecting to record further losses, which would “negatively impact the regulatory capital ratios of the Company… and could result in the Company and the Bank being less than well-capitalized”;

5.       Major crypto companies that were working with Silvergate announced they would be stopping the partnership: Coinbase, Galaxy Digital, Paxos, Gemini…

6.       The market is now waiting for Silvergate’s annual report, which has been postponed to March 16, notably to see whether its leverage ratio has slid below the conventional 5%, which would trigger an emergency intervention 🚨from the regulators.

Which consequences to the crypto firms?

Yes, Silvergate is a bank that is having bank problems, caused by insufficient sectoral diversification and poor risk management. If it specialized in literally any sector other than crypto, we would have ended there.

However, the fact that Silvergate is a crypto-friendly bank, changes it all in the eyes of mainstream media, mainstream politicians, and mainstream public. Suddenly it’s all crypto’s fault 🤷‍♀️

As a reader of this Newsletter, you can see how illogical this statement is, but still, public opinion matters, for it can bring about a whole set of consequences for the crypto markets:

➡️  In the short term, crypto markets take the hit, with $BTC plunging -6% to the news (recovering a third since).

➡️  In the medium term, the banks, especially in the US, will be reducing their exposure to crypto clients, or, as Bloomberg called it, “embarking on a widespread pullback from the cryptocurrency industry.”

Signature, one of the most crypto-friendly banks in the US, has already announced it would be shedding as much as $10 billion in deposits from the crypto firms. The rising political and regulatory pressure on the crypto business in the US would only speed up this process.

Companies cannot exist without a bank (at least for now 😉), and many will explore opportunities in Switzerland (Sygnum, SEBA), Germany (Fidor), Luxembourg (Striga), Bahamas (Deltec, Capital Union), UK (Revolut)… Those who won’t find a suitable option will lose business and clients.

➡️  In the longer term, however, the void left by the retractors could be filled with new US banks, or – even more likely – traditional banks that can embark many crypto clients without harming their diversification. This would require an important mindset shift, but it is possible that business reasons prevail over biases.

This process may have already started: last year, we wrote about major banks’ timid (and sometimes hypocritical) steps in the crypto direction. This trend may take a more concrete form after regulators come up with a clear set of guidelines, however tough those may be.

Changing the mindset

Somehow, we believe that US crypto firms will find themselves new banks.

The most disconcerting part of this story is how every new failure of a traditionally managed financial company working with crypto (or crypto clients) ends up tarnishing the reputation of crypto itself.

⚠️ It was the traditional finance mechanism that failed to prevent Celsius’ liquidity crunch.

⚠️ It was the traditional finance mechanism that failed to prevent FTX managers from committing fraud.

⚠️ It was the traditional finance mechanism that failed to prevent Silvergate’s losses.

Crypto is a tool that can help find new solutions to the centuries-old problems of financial institutions. The nascent DeFi sector already counts so many fully functioning applications: crypto exchanges, lending-borrowing programs, liquid staking, asset management…

By the way, have you noticed that apart from Terra, all the other crypto crashes of 2022 were centralized companies? 💥

To allow innovation, we (as a society that has the possibility to influence its politicians) must distinguish crypto itself from the non-crypto companies that work with it, and learn to tackle their respective problems. The countries that will do it better will become the future financial hubs of the world 💪