It seems like the crypto market has been acting weird lately. Just last week, Silvergate crypto most important bank closed its exchange network. This was used by large investment companies and stablecoins issuers to move billions in and out of the crypto market 24/7.
The absence of this ability seems to be profoundly affecting crypto market liquidity and the insolvency of Silvergate the risk of regulators will accelerate their crackdown on cryptocurrency.
Silvergate Background
This is a Californian bank founded in 1988. And a flashback to the 2008 financial crisis which Silvergate was not affected, Alan Lane emerged as the CEO that same year. He turned Silvergate's focus to crypto after investing in Bitcoin in 2013 but the actual is a lot crazier. In 2019, Allan met someone from a company called Second Market the marketplace for illiquid assets/stock and they were exploring providing liquidity to small banks like Silvergate. The second Market CEO/Founder was Barry Silbert. He happened to be the founder and CEO of a digital currency company the largest company in cryptocurrency. Historically, Cryptocurrency had a hard time getting banked and Second Market reached out to Silvergate in 2013 looking for crypto banking services. Though at first, Allan was skeptical but large looked into Bitcoin as an untapped market, and by 2017, Silvergate has onboarded over 250 crypto companies and its deposit has grown to 2 billion dollars. This same year, Silvergate came with the launch of its own exchange network that would make it possible to transact Fiat currency and cryptocurrency 24/7.
Goodbye to regular banking hours in 2018, as Silvergate launched a 24/7 exchange network that attracted over 250 crypto companies. These companies became nodes on SEN Network.
The SEN Network made it possible for these companies to instantly transfer cash and crypto ensuring robust market liquidity. Silvergate provided banking services and SEN Network access to the largest companies in cryptocurrency (Coinbase, Kraken, Gemini) and also stablecoins like Circle, Paxos, and Trust tokens which issue TUSD. Silvergate launched an IPO in 2019 to make some part of the company shares trading in the stock exchanges in the United State.
The Problem
Now, having some information about Silver gate, what happened?
Silvergate is a big company with over 850 clients which includes, 61 exchanges, 541 institutional investors, and 250 other customers on an estimate.
The Silvergate stock price went parabolic along with the crypto market in 2021 which made its price reach almost 16X from its IPO price. At the beginning of 2022, things were good for the exchange but as the crypto market crashed, Silvergate began to receive questions from all sides about the bank's solvency because Silvergate offered a USD loan backed by BTC and had famously Lent MicroStrategy of over 200 million dollars using BTC as collateral. This is risky. But the SEN Network was built to sell off any BTC being used as collateral.
Now The Problem: FTX & Alameda Research
Alameda Research opened an account at Silvergate in 2018 and passed the crypto bank's extensive due diligence checks. Íts believes that FTX used Alameda's account at Silvergate to move customer money around and seems like Silvergate may have been aware that something bad wanted to happen. They released a statement reassuring their clients, SEN Network continues to work without issue and Allan also said, the bank has the ability to borrow from Federal Home Loan Bank in the event of any liquidity issue.
In December 2022, US politicians started calling for investigation into Silvergate over its connection to FTX and Alameda. Also, a class lawsuit was also launched against the bank by some of its customers.
In January 2023, Silvergate revealed that it had experienced an 8.1 billion dollar bank run which wiped out all of the profits it has made since 2013, it also cut off 40 percent of its staff to stay afloat, and was revealed that the bank has taken loan from Federal Home Loan Bank. Here Blackrock boosted his stake and buy the dip happening with Silvergate and took a 7.2 stake.
In February 2023, the department of justice announced it was investigating Silvergate over FTX and Alameda situation. With all these, Silvergate become the most shorted stock out there.
Now, Silvergate shut down SEN Network.
This act of shutting down the SEN Network leaves its highest crypto clients to abandon ship to other crypto banks. Again, the bank is winding down operations and will liquidate all its assets and this might be acquired by a megabank like JP Morgan, this could potentially give control of crypto's most valuable piece of financial infrastructure to wall street.
Silvergate is down, what next?
The shutting down of SEN finished everything because this was a great infrastructure for the crypto industry. Silvergate is the only crypto bank with a 24/7 network for fiat and crypto. Now, there are two crypto banks in the US: Signature Bank and The Metropolitan Bank. The Metropolitan Bank announced its exit from crypto banking following a regulation threat which means the only crypto bank now is Signature Bank.
Signature in January limited USD deposits to only Binance US and this led to the Kraken exchange stepping away due to the transfer limitation. The shocking aspect of the story is, Signature already received a 10 billion dollar loan from the Federal Home Loan Bank in Q4 2022, that's like 4 times what Silvergate received. This can also lead to Signature scrutiny, though it has no problematic crypto clients at the moment.
If Silvergate officially collapses, anti-crypto regulators and politicians will have the pretext they need to crack down on Signature and other remaining crypto banks. They will simply say crypto is threatening the banking sector.
Now you need to check which banks your favorite crypto exchange has access to. It's better to withdraw your cash to your own account and keep your own crypto in your personal wallet.
Even if the remaining crypto banks are somehow allowed to operate without scrutiny, the fact is SEN Network is offline and this is the only network that allows a 24/7 crypto market, this is a big blow to the entire crypto market. It is certain we may see some serious volatility as a serious or a total absence of volatility.
Thanks to the BCB Group working on a replacement for the SEN Network. This might take some months before the launch and the strange price action of crypto will continue.