Banks are the lifeblood of a nation’s economic system, and any bank collapse is disturbing. Last week saw two failures. On March 8, Silvergate Capital
Banks are the lifeblood of a nation’s economic system, and any bank collapse is disturbing. Last week saw two failures. On March 8, Silvergate Capital — the cryptocurrency-focused banking company — entered into voluntary liquidation. On March 10, United States regulators shut down and seized the deposits of tech-oriented Silicon Valley Bank in what was being called the second-largest bank failure in U.S. history. Both California institutions were victims of bank deposit runs.
The fallout from the collapse of Silicon Valley Bank (SVB) could be significant, though it’s too early to tell. Stablecoins like USD Coin (USDC) and Dai (DAI) losing their dollar pegs is never a good sign, but they were recovering by Sunday, March 12. However, it’s unlikely that the Silvergate Bank debacle will cause long-term harm to the crypto sector.
The fall of the San Diego-based Federal Reserve-member bank should be a minor event compared with the earthquake unleashed by FTX’s November 2022 bankruptcy, sources told Cointelegraph. FTX’s implosion damaged scores of crypto firms, including Silvergate Bank. By comparison, the fallout from the bank’s liquidation should be more contained. It might even provide some valuable lessons about diversification — a fundamental principle of risk management that seems to be forgotten when markets soar.
There will likely be short-term consequences that will likely make life more difficult and costly for crypto firms to find banking services in the United States. And it’s not just the U.S. that is seeing some turmoil.
In Latin America, which is primarily a crypto foreign exchange (FX) market where many firms buy stablecoins like USDC and Tether (USDT) as a means of sending funds abroad, “the Silvergate fallout was problematic,” Thiago César, the CEO of fiat on-ramp provider Transfero Group, told Cointelegraph.
“Most crypto exchanges lost their U.S. dollar rails.[…] It impacted the alternative FX market in LATAM fueled by crypto.” Local Brazilian dealers in USDT and USDC suddenly couldn’t replenish their inventories, César reported. (This interview was conducted before the SVB seizure, which rattled some stablecoin firms further.)
Josh Olszewicz, head of research at Valkyrie Digital Asset Management, told Cointelegraph: “The lack of on and off-ramps as well as general banking needs of consumers and businesses interacting with the crypto industry may be hampered in the near term.” Coinbase, Paxos, Gemini, Bitstamp and Galaxy Digital, among others, were using Silvergate as a banking partner.
That said, the Silvergate collapse probably doesn’t present long-term obstacles. “Fundamentally, a bank exiting the crypto industry does not hurt any blockchain, including Bitcoin,” Olszewicz added.
Lessons learned?
Joseph Silvia, partner at law firm Dickinson Wright — and former counsel to the Federal Reserve Bank of Chicago — views Silvergate Bank’s liquidation more as a “cautionary tale” than a harbinger of tougher times for the crypto sector. The bank was insufficiently diversified and dependent on the crypto industry for its deposits. Similarly, Silicon Valley Bank was arguably too concentrated on tech-based venture capital firms. In both cases, a trickling away of customer deposits rapidly turned into a torrent.
More than 90% of Silvergate’s deposits were from crypto-related firms, and after FTX’s November implosion, nervous investors withdrew those deposits in what amounted to a classic bank run. This activity did not go unnoticed by U.S. bank regulators. The Federal Reserve and the Office of the Comptroller of the Currency issued a joint statement in February, warning banking organizations about “liquidity risks” as the result of “crypto-asset market vulnerabilities.”
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In the wake of Silvergate’s liquidation, some traditional banks may now shut the doors entirely to crypto accounts, while others may severely limit acceptance of crypto deposits, said Silvia. This will probably increase costs for U.S. crypto firms as their banking options become more limited.
Aside from being too concentrated on a single high-risk industry sector, Silvergate may have invested in the wrong assets. As Austin Campbell, an adjunct professor at Columbia Business School and managing partner of Zero Knowledge Consulting, told Cointelegraph, “Essentially, you either want a highly diversified deposit base if you have longer-dated assets because you can’t easily survive a run and need the diversification, or if you are highly concentrated, you should have a much shorter duration asset base so that you can easily liquidate in the case of a mass withdrawal.” Campbell added:
“Silvergate was highly concentrated and had longer duration securities. You can’t do both. You need to pick one. They would have been fine being this concentrated if they didn’t extend out duration on the asset…
cointelegraph.com