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John Martin 23 Aug 2023 ◦ 6 min read

Crypto Market Falls Due to Crisis in Silvergate

Crypto Market Falls Due to Crisis in Silvergate

Shocks continue in the cryptocurrency market. This time they are associated with Silvergate - one of the main crypto banks that provide the connection between traditional finances and cryptocurrencies.

Silvergate was one of the first in the United States to provide clients with crypto banking services. We are talking about both lending and the provision of liquidity. For a long time, recognition from the former head of the FTX, Sam Bankman-Fried, stayed on the bank's website: "The life of cryptographers can be divided into ‘before’ and ‘after’ Silvergate."

News about solvency problems led to the flight of institutional clients, and the vast majority of crypto assets fell in value.

What Happened?

Silvergate is an American bank specializing in cryptocurrencies. The bank manages the Silvergate Exchange Network (SEN) payment system, which allows cryptocurrencies and other customers to exchange cryptocurrencies for fiat money. Many of the world's leading miners, exchanges, and institutional investors used Silvergate to keep and transfer billions of dollars in assets.

In 2022, the bank received a loss of $949 million. At the end of January, it suspended the payment of dividends on preferred shares "to preserve capital." On March 1, Silvergate announced that it would delay filing its annual financial report with the U.S. Securities and Exchange Commission (SEC) for two weeks.

The bank said it does not have time to submit a report by March 16 due to the continued weakening of Silvergate bank stock capital. Silvergate also reported that it "assesses the ability to continue as a continuously operating entity within 12 months of the release of financial statements" and is now "in the process of revaluing business and strategies in light of the challenges it faces."

First of all, rumors about the company's financial problems affected the exchange quotes of the parent company Silvergate Capital (SI). In one day, Silvergate stock quotes on the New York Stock Exchange collapsed by more than 57% to $5.7, according to TradingView. The crypto bank's market capitalization collapsed to $428.3 million.

Silvergate is considered an extremely important financial institution for the American cryptocurrency market. The fact is that the bank is not only regulated by the Federal Deposit Insurance Corporation but is also a member bank of the US Federal Reserve.

The American crypto businesses almost immediately began to urgently cut off ties with Silvergate.

Amid news of a possible bankruptcy of Silvergate Bank, American representative offices of various cryptocurrency companies began to announce the termination of cooperation with the bank. So Silvergate Bank services were refused by:

  • LedgerX. The platform refused to use Silvergate for internal bank transfers, switching to service at Signature Bank.
  • Coinbase. The crypto-exchange no longer accepts or initiates payments through Silvergate.
  • Galaxy Digital. The fintech company ended its partnership with Silvergate "for precautionary reasons."
  • Paxos. The crypto company stopped all transfers through Silvergate Exchange Network but will continue to process outgoing payments.
  • Bitstamp. The crypto-exchange no longer processes transfers through Silvergate, initiating transfers by "other global banking partners."

Other representatives of the US cryptocurrency market monitor the development of events around Silvergate Bank, notifying customers of the lack of ties with the troubled bank: 

  • Gemini. Representatives of the crypto exchange said that the company does not store the funds of customers and GUSD in Silvergate.
  • Tether. Paolo Ardoino, Chief Technical Officer of Stablecoin Issuer USDT said that the company "has nothing to do with Silvergate."
  • Circle. Representatives of the USDC stablecoin issuer did not confirm their connection with Silvergate, saying only that they would keep customers "informed."

It is worth noting that the fears of cryptocurrency companies regarding the future of Silvergate Bank are also related to the investigation by the US Department of Justice. According to Bloomberg, the Department of Justice's anti-fraud department is studying Silvergate Capital's transactions with the bankrupt FTX crypto exchange and its affiliate Alameda Research. Although the prosecutor did not bring any official charges against Silvergate, the crypto community is still afraid of the consequences of the criminal investigation and its influence on the bank's partners.

In its filing Wednesday with the SEC, Silvergate also said it is "currently analyzing certain regulatory and other requests and investigations that are pending against the company."

Silvergate added that it is now "in the process of reassessing its business and strategies in light of the business and regulatory challenges it is currently facing."

Impact on Bitcoin Price

On the morning of March 3, the Bitcoin rate fell by $1.2 thousand within an hour. The cost of the first cryptocurrency decreased by 5%, dropping from $23.4 thousand to $22.2 thousand. According to CoinGecko, the asset is traded at $22.3 thousand, and the daily decrease is 4.6%.

The values of leading altcoins also showed a rapid decline. Ethereum fell in price per day by 5.5% (from $1.64 thousand to $1.55 thousand), and Ripple - by 2.4% (to $0.36). Cardano price fell 4.9% (to $0.33), Solana - 4.2% (to $21.02).

The biggest decline was experienced on March 3, when news appeared about the problems of Silvergate Bank and its inability to provide data for the US regulator during the time.

On the other hand, there is a point of view according to which Silvergate problems did not affect Bitcoin in any way and all coincidences are random. This is the opinion of the founder and CEO of Pixelmatic, Samson Mow:

"Silvergate's downfall and the exchange's loss of its usual banking system has no impact on Bitcoin. The collapse of the fiat banking system for exchanges means only that the purchase/sale will switch to P2P. This is the same as it was in China. "

Time will tell whether Mow will be right in the long run. In the meantime, it can be stated: Silvergate's problems caused a short-term effect, and at least speculative sales are catalyzed by this fact.

The bank has problems not only with the US SEC. Many companies refuse to accept payments that go through Silvergate. One of the first to refuse was Coinbase.

Closing Announcement

On March 9, Silvergate Capital announced the closure of its Silvergate cryptocurrency bank. Its activities will be stopped, and the bank itself will be liquidated by the law, the press release said.

"In light of the latest developments in the industry and its regulation, Silvergate believes that a systematic curtailment of the bank's operations and voluntary liquidation is the best solution. The bank's liquidation and liquidation plan includes the full repayment of all deposits, "the company said. What to expect soon from the crypto market and who is next?

Over the past year, at least three serious falls have occurred in the crypto industry. Terra Luna (here is Three Arrows Capital), FTX and Alameda Research, and now Silvergate with all the ensuing. Moreover, the grip of the regulators continues to contract. On January 3, 4 US financial regulators published a joint statement warning of risks associated with cryptocurrencies and a call for banks to limit cooperation with cryptocurrency companies.

The situation here is indeed scrupulous, which requires a mandatory dialogue between both parties (cryptocurrency community - regulator) and the search for compromises. The fact is that the authorities are trying to expose Silvergate bankruptcy, FTX, that Terra Luna, as a cryptocurrency problem, and not mistakes or intentional fraudulent actions of the leaders of these companies.

We will keep you informed about upcoming Si news.

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