Seems like every time digital assets try to shake off the long crypto winter, another contagion event is lurking in the corner
It has been one challenge after the other for cryptocurrencies in the last 12 months or so. The long ensuing winter seems to make a comeback with a vengeance, every time the digital assets begin to shrug off the weakness. After two massive contagion events in the form of LUNA collapse and FTX bankruptcy, cryptos finally had a glimmer of hope with an impressive bounce to start off 2023 — that too now seems to be in jeopardy.
As if the macroeconomic conditions like an aggressive Federal Reserve were not enough to sour the bullish sentiment — now we have another fiasco unraveling the Cryptoverse. In the latest twist of events, major crypto bank Silvergate says it will wind down its operations. Unsurprisingly, shares of the California-based crypto bank plunged over 40% in extended trading on the heels of the announcement. It was only last week that it said it would delay filing its annual report due to pending investigations by the U.S. Department of Justice and other regulators.
Silvergate Bank started as a savings and loan association in the late 1980s, reorganized into a community bank in the mid-90s, and pivoted into cryptocurrencies a decade ago. At the time, no other mainstream banks were even thinking about crypto, and its assets continued to grow rapidly, especially after the launch of the “Silvergate Exchange Network.”
“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of bank operations and a voluntary liquidation of the bank is the best path forward,”
~ Bank statement
The instant payment platform allowed clients like major crypto exchanges and institutional investors to send fiat currencies like the dollar to other Silvergate accounts at any time, even when traditional banks were closed on nights and weekends. The hype surrounding crypto prompted Silvergate to go public in November 2019 at a share price of $13, and within two years, the price was up over 1,500% to reach an all-time high of over $219.
In 2021, Silvergate attempted to launch its own stablecoin by acquiring Meta’s (META) Diem technology, but things were starting to sour in the industry. The crypto winter set in, and after nearly a year of icy conditions, Silvergate was dealt a severe blow when its digital asset customers withdrew deposits in the wake of FTX’s collapse.
Several analysts were warning about the impending doom for months, especially given the exposure to Sam Bankman-Fried’s short-lived crypto empire. Later in January, Silvergate said it would streamline its product portfolio, cut headcount, and reassess customer relationships, but it was not enough to stop the damage. And at the time of writing, the crypto bank’s shares have plunged to less than $4 — a massive 98% drop from the 2021 peak (charted below).
A final red alert came last week when it discontinued the Silvergate Exchange Network and flagged its ability to continue as a going concern. The collapse of Silvergate is expected to have a significant impact on the crypto market, as the bank was a major player in the industry — scrutiny by regulators and a criminal investigation by the Justice Department are major causes for concern right now.
The ongoing probe focuses on Silvergate’s dealings with collapsed crypto exchange FTX and its hedge fund, Alameda Research. Silvergate has over $11 billion in total assets, and its collapse will have a ripple effect on the wider market. FDIC regulators had been trying to salvage the bank’s operations over the last few days but will now allow it to liquidate.
One thing is for sure, a delayed regulatory framework is creating problems. Regulations don’t necessarily mean stifling innovation and growth, but to have a necessary framework in place that only allows companies with proper due diligence and sustainable business models to operate in the nascent space — keeping all the market participants safe.
A stablecoin, one of the biggest crypto exchanges, and now a well-known crypto bank have now failed within ten months — time to take stock of everything before all hell breaks loose.
Originally Published on Medium
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