Silvergate shuts down: What are the implications for the industry?

Winding down Silvergate

Silvergate Capital, a central lender in the crypto industry, has announced that it is shutting down. The decision to wind down operations and liquidate its bank was made in response to recent industry and regulatory developments, according to a statement released by the company. The news caused the stock to plummet by over 40% in after-hours trading.

The decision to wind down was made after the company's board of directors conducted a strategic review of its business and determined that the crypto banking model was no longer sustainable. The board cited several factors, including increased regulatory scrutiny and competition from other players in the market, as reasons for the decision.

As part of the liquidation plan, the company has promised to fully repay all deposits while stating that all other deposit-related services will remain operational as the bank goes through closing operations. The company has also promised to keep customers informed of any further changes.

The news of Silvergate Capital's shutdown is likely to increase regulatory of the crypto industry even further scrutiny. With concerns about anti-money laundering (AML) and other issues growing, regulators are likely to be more aggressive in ensuring compliance with regulations. This could have significant implications for the industry, particularly those operating in jurisdictions with less clear regulatory frameworks.

Silvergate Capital and New York-based Signature Bank were the two central banks for crypto companies. While Signature Bank has over $114 billion in assets, Silvergate Capital has just over $11 billion. However, the bank was a crucial player in the crypto industry, serving as a significant lender and providing banking services to many crypto companies and exchanges such as Coinbase and Galaxy Digital. Its closure will leave a significant gap in the market that needs to be filled soon.

The liquidation comes less than a week after Silvergate discontinued its payments platform, the Silvergate Exchange Network (SEN). As part of the liquidation announcement, Silvergate clarified that all other deposit-related services remain operational as the company winds down.

The Contagion that Silvergate could cause

Silvergate Capital's closure will likely have significant implications for the crypto industry. The decision could leave a big gap in the market for those looking for banking services tailored to the needs of the crypto industry. Moreover, the decision to liquidate will likely increase regulatory scrutiny of the industry as regulators look to ensure compliance with regulations. The liquidation of Silvergate will force the regulators to take a closer look at the cause of liquidation and determine if there were any violations or systematic risks.

Furthermore, liquidating a major player in the industry could cause a ripple effect on other crypto companies, potentially leading to increased financial instability and market volatility. This will lead to further regulatory scrutiny as regulators seek to mitigate any potential risks to the traditional financial system.

The closure of Silvergate Capital is also likely to impact the broader financial sector. Institutional investors such as Blackrock (7%) and Citadel Securities (5.5%) held the bank's shares. They are likely to take a hit due to the liquidation. This could further erode confidence in the industry, particularly if other crypto companies or exchanges face similar challenges in the coming months.

While this news has sent shockwaves throughout the crypto industry, alternatives are already being built by the industry's leaders. In a recent update, Kraken indicated they plan to launch their bank. Marco Santori, Kraken's Chief Legal Officer, confirmed this news during a recent interview on The Scoop podcast, stating that "Kraken Bank is very much on track to launch very soon.

After the news of Silvergate, the share price of Signature bank also plummeted as speculators feared that the liquidation of Silvergate could have effects on Silvergate. Caitlin Long, founder and CEO of Custodia Bank, highlighted that the closure of Silvergate Bank was not triggered by the bear market facing cryptocurrencies. Long explained that the bank's collapse was caused by the $13.3 billion in deposits being withdrawn in minutes. In comparison, Silvergate only held $1.4 billion in cash.

Will crypto become unbanked?

With Silvergate closing shop, the industry leaders are looking for an alternative. Recently, Coinbase and Galaxy Digital announced that they would no longer work with Silvergate. With Silvergate leaving a gap in the market, an alternative is needed. Signature bank has its version of SEN called Signet. Signet is a program that leverages blockchain to facilitate immediate transactions. CEO Oliver von Landsberg-Sadie mentioned that the company is now hastening efforts to incorporate U.S. dollar abilities into its payments processor to address the gap created by the disappearance of SEN. As long as alternatives appear to fill in the gap, crypto organizations can weather the current storm and remain a banked industry.

Overall, Silvergate's decision to wind down operations and liquidate its crypto bank will represent a significant moment in the evolution of the crypto industry. While the move may be seen as a setback for the industry in the short term, it also highlights the need for continued innovation and adaptation in the face of shifting regulatory and market conditions.