Before Silvergate and after Silvergate


Earlier this year, American Banker reported that Silvergate and Signature, two US banks friendly to the crypto industry, received loans from a federal program originally created to support mortgage lending. It has been a painful thing to learn in some corners of the crypto industry. They recall that when Satoshi Nakamoto released the codebase for Bitcoin in 2008, it was as much a political statement as a technical revolution. Even before cryptocurrencies were called “cryptocurrencies”, it was understood that this alternative financial system played by predetermined rules: no help.

Of course, not everyone was upset when they heard that Silvergate issued this Federal Home Loan Bank, which is important to bring dollars to the crypto-economy. Because banks are banks. But few will be happy to hear that Silvergate may fail, even if it seems karmic. The bank announced today that it is delaying its filing with the Securities and Exchange Commission for the first time after a last-minute sale of assets to pay off the outstanding balance on a federal loan. The company lost $1 billion in the fourth quarter of 2022 alone, a figure that could be revised upward, and still has additional debt obligations, meaning it could soon be “less than well capitalized,” according to Silvergate’s filing.

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Betting on when a company is going to fail is a tricky thing – often best left to professional investors. Although Silvergate’s own predictions are dire, things may change. However, it does not bode well for companies, including crypto exchange Coinbase, to switch banking partners to Silvergate’s main rival in the crypto industry, Signature. In January, one of the cryptocurrency industry’s most prominent and influential investors, Ark Invest’s Cathy Wood, lost 99% of the company’s Silvergate holdings in its hack-focused investment fund. . Most of Silvergate’s shares were sold short, including a more than $1 million position taken by billionaire trader George Soros’ hedge fund.

Silvergate’s challenges come amid a regulatory backlash against crypto, particularly those interested in reducing the risk of crypto spillover into the mainstream economy. CoinDesk columnist and venture capitalist Nick Carter went so far as to call the situation “Operation Choke Point 2.0,” a reference to the secret Obama-era policy of pressuring banks not to serve legitimate but morally questionable industries. Indeed, on a single day in January, four White House advisers released a letter advising banks against crypto exposure; The National Economic Council has issued similar guidelines banning many financial institutions from dealing in crypto; The Federal Reserve rejected a request from crypto-custodian Custodia Bank and issued a policy statement detailing the risks of banks holding crypto-related deposits, including stablecoin reserves.

See also: Senators pushed Crypto Bank Silvergate through FTX ties

I have made it clear that cryptocurrency will always be on the other side of the tipping point, and that increased transparency will increase the number and quality of banking relationships for crypto businesses. The industry isn’t going anywhere, and the bankers I know still see an opportunity to sell. It doesn’t really say anything about Silvergate, especially not on the question of karma: If Silvergate fails, will it be good for the industry? The bank signed up its first cryptocurrency client (Barry Silbert’s SecondMarket, which was CoinDesk’s parent company, Digital Currency Group) in 2014, when cryptocurrency firms found it impossible to obtain or maintain bank accounts. FTX founder Sam Bankman-Fried described the situation as follows: “The life of the crypto business can be divided into pre-Silvergate and post-Silvergate.”

This Bankman-Fried testimony, which has been removed from Silvergate’s website, may shed some light on the bank’s bottom line. The US Department of Justice has launched an investigation into Silvergate to determine whether the bank committed or contributed to fraud at FTX and Alameda Research. The investigation is ongoing, but as noted by crypto-horse Protos, it appears that FTX directed customers to Alameda’s bank account in Silvergate. In an open letter to the bank in December, U.S. Sen. Elizabeth Warren (D-Mass.) and others called the practice “a flagrant violation of your bank’s responsibility to monitor and report suspicious financial activity.” through customers. That may be true enough. But who says it’s right?

The views and opinions expressed herein are those of the author and are those of Nasdaq, Inc.

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