The next drama? Krypto-Bank Silvergate fights for survival
Silver statuettes. Image by Emma Nibaru via Flickr.com. License: Creative Commons
As soon as the FTX collapse seems to be somewhat digested, the next catastrophe for the crypto market is based: the Silvergate bank breaks down. The Californian bank has processed a very large part of the dollar transactions in the ecosystem. Now these almost completely depend on a remaining bench ..
Yes, the idea of Bitcoin and crypto is to become regardless of banks. Bitcoin does not need a bank, Ethereum does not need a bank, token does not need a bank, smart contracts do not need a bank. Per se.
If crypto would work in a vacant room, without connections to real economy, there would be no banks. But because this is not the case, but bitcoins and other coins are draded against dollars like wild, and even if the dollars run as stable coins on a blockchain, a bank is involved, the ecosystem is still in enormous dependency on banks. And that leads to major problems behind the scenes.
Silvergate Bank currently seems to be the sick man of the cryptoma market.
From a small bank to the colossus thanks to crypto – and back again
Silvergate Capital is a rather small bank from California, which specializes in 2013 to handle dollar payments for crypto companies such as stock exchanges. After the bank had won some of the largest stock exchanges as customers – such as Binance, Kraken or Gemini – she grew rapidly. It is worth working with crypto, especially if all other banks are committed.
🧵1/Ω
Eli5: Why Did #silvergatebank / $ si Just Implode?
I realize some people may be Wondering WTF Just Happened so here here’s the unannotated short version ..
The Story Begins When $ Si, A Small Regional Bank, Decided to Go Full Crypto.
– ⚯ m cryptadamus ⚯ | @Cryptadamist@Uneverseodon.com (@Cyptadamist) March 4, 2023
The Silvergate stock exchange course had exploded until the end of 2021, from once a few to almost $ 200. The bank held around $ 15 billion in deposits and handled the “Silvergate Exchange Network” (sen) transactions worth $ 750. Sen is based on a blockchain that is probably architecturally based on Facebook’s ex-project Libra.
Together with the Signature Bank, Silvergate processed the majority of the dollar payments of crypto exchanges. The two banks together had a transaction volume of around $ 1.75 trillion a year, which corresponds to 15 percent of all visa transactions or 0.7 percent of all global bank transfers. The volume is huge, and this mass alone should initiate problems with the supervision.
Now Silvergate seems to be a collapse. The share price has collapsed by almost 95 percent over the past 12 months, with the collapse accelerated last week. The course fell from 13 to barely five dollars, and the big customers try to leave the bank.
One of the exciting questions of this drama is how it could happen. Because Silvergate had a fantastic business model: the bank held huge sums of money in its accounts and was able to buy safe and interest -bearing papers such as government bonds. With only 1-2 percent interest, Silvergate earned many millions of dollars a year. How can you go bankrupt here?
All the profits powdered themselves
The explanation is interesting: Silvergate bought the US state bonds at historically low interest phases when it was only offset about one percent a year. It was still less favorable that the bank had bought very long -term papers, for example with a term of 10 years.
Now it happened that the US Central Bank Fed had increased interest rates, so that government bonds imported in about four percent interest. Of course, nobody wants to buy the 10-year low-interest government bonds that Silvergate has acquired. Their value on the second market fell to around 90 percent.
This is not a problem in itself – if you don’t want to sell the bonds. Silvergate could have just sitting out and low, but solid interest, but then the collapse from FTX came.
Customers wanted to pay their money that broke out, and Silvergate remained no choice but to sell the government bonds with losses to operate payout requirements. Supposedly the bank lost around one billion dollars a month. All the profits that had been done since 2013 flowed there.
It was still worse that customers had lost their trust. Rumors about a bankruptcy, which was almost the same for a bank, the product of which is primarily trust, as the bankruptcy itself. Customers left the bank and pulled their deposits off. It came to the bank run and the fall accelerated. At the end of last week, the bank switched off the SEN network, which gives it up to the crypto market.
The pillar that still remains
This could be uncomfortable for the crypto industry. 750 billion dollars of annual dollar transfers break away, and almost the entire dollar flow between the stock exchanges now runs via signature, the remaining bank is now. Of course, this now enjoys attention that a bank with this business model can only be uncomfortable.
Like Silvergate, Signature uses a blockchain -based network, signature to transfer dollars in real time between its customers. Most big Bitcoin exchanges have joined Signet, which, like sen, builds on Libra technology. For example Coinbase, Bittrex, FTX, Kraken, Bitstamp or Binance.
There is now an almost infinite amount of rumors about machinations in which signature should be involved. It starts with the fact that it is said that it would be the bank of Tether, to allegations of money laundering or violation of sanctions. What exactly is about it is currently not to be said. However, it becomes clear once again that fiat transactions are the weak point of the cryptoma market, and that a collapse of Silvergate-and possibly also signature in the following-would lead to the current frictional friction in the market.
