Silvergate Bank
March 2023 has been a challenging month for banks operating in the crypto industry. The termination of operations has already been announced by Silvergate, Signature and Silicon Valley.
What awaits crypto investors amid these events? Silvergate Bank The first to go out of business was Silvergate Bank. This is the smallest of the banks considered in the article – its assets totaled only $11 billion.
On the other hand, this did not prevent it, along with Signature, from being the largest bank involved in the crypto industry. Silvergate was founded in 1988 and is headquartered in San Diego, California.
The first 8 years – until 1996 – Silvergate was officially an association for savings and loans (S&L). For the first time, he plunged into the crypto industry in 2014, and later almost completely switched to working with cryptocurrencies.
Since 2018, the bank has launched its own Silvergate Exchange Network (SEN) platform, with which it was possible to quickly replenish various exchanges with fiat. The first news about the likely problems of Silvergate Bank appeared at the end of last year.
The fourth quarter of 2022 turned out to be horrific for the organization – a net loss for this period amounted to about $1 billion. This was mainly caused by the collapse of FTX, which led to a decrease in deposits in crypto assets by more than three times – from $11.87 billion to $3.8 billion Silvergate had to sell the securities it held.
Basically, these are bonds, the prices of which have fallen unprecedentedly due to the actions of the Fed in relation to interest rates and controversial policies to prevent inflation.
In January of this year, it became known about the reduction of the bank’s staff by 40%. All these events did not fail to affect the company’s shares, the price of which has fallen 23 times since November and 6 times in March alone.
Source: tradingview.com
Silvergate Bank faced reporting delays for the year 2022 in the early spring, which prompted the termination of its relationships with top companies such as Coinbase, Galaxy Digital, and Paxos.
As a result, the bank had to take significant steps that ultimately led to its liquidation. On March 3, SEN halted its operations, and on March 8, the bank announced that it was the best solution to voluntarily terminate its operations and liquidate its assets, given the current circumstances. Thus, the events unfolded as follows:
1. The Fed is raising rates to fight inflation as a disproportionate amount of money was printed during the pandemic. The decision turned out to be controversial, and some economists predicted a possible recession in the economy long before a series of problems with banks.
2. The collapse of one of the largest crypto exchanges at that time, FTX, causes panic in the market. The mass withdrawal of cryptocurrencies and their sale begins.
3. Against this background, many investors seek to withdraw funds from deposits.
4. At some point, the bank needs a lot of cash, which is not available, as a result of which it has to sell securities, in particular bonds.
5. Bonds are selling at a big loss as their price collapsed after the aforementioned rate hike.
6. There is a net loss of $1 billion
7. In early January, the layoff of 40% of the staff is announced. This can be explained by the fact that the platform was trying to cut costs.
8. At the beginning of March, relations with a number of major players were cut off after delays in reporting for 2022 were announced.
9. The bank is liquidated.
The downfall of Silvergate Bank can be attributed to a series of events that occurred in succession, including the actions of the Federal Reserve, the collapse of FTX, and the subsequent investor panic.
Whether or not these events could have been foreseen is a matter of debate. For instance, in January’s end, the biggest investment firm, Blackrock, held 7% of Silvergate’s shares, yet even they couldn’t anticipate the sequence of events that unfolded.
Silicon Valley Bank
Silicon Valley Bank (SVB), which was considered the largest bank in the article, became the next bank to go out of existence.
The bank had assets worth more than $200 billion under the leadership of its CEO. Founded in 1983, SVB’s headquarters were located in Santa Clara, California.
At the time of its liquidation, SVB was the 16th largest bank in the United States, and it primarily worked with fintech startups, including those in the cryptocurrency industry.
On March 8th, the company released a development strategy for the first quarter of 2023, indicating that there were no signs of trouble.
However, over the next two days, a series of events led to the bank’s bankruptcy.
On the evening of March 8th, SVB announced that it had a $2.25 billion hole in its budget, which caused panic.
One of the reasons for this was the situation with Silvergate, which was mentioned earlier. This led many venture capitalists to withdraw their funds, and the Fed’s actions added fuel to the fire.
SVB’s primary clients were startups that needed financing, and the only way to get a loan was from a bank, which would be expensive due to the current monetary policies of regulators.
In such circumstances, paying wages, loans, and other expenses was challenging. Like Silvergate, SVB started selling its bonds, resulting in a loss of just under $2 billion.
The next day, on March 9th, the bank’s CEO, Greg Becker, urged customers to remain calm, but his appeal proved unconvincing. Meanwhile, SVB’s share price more than doubled.
Silicon Valley Bank
On the evening of March 9th, an alarming $42 billion had been withdrawn from SVB deposits, causing almost $1 billion in negative cash flow per day.
The panic surrounding this situation is what ultimately “buried” the SVB. Investment funds, such as Founders Fund, Union Square Ventures, and Coatue Management, began urging startups they finance to withdraw their funds, further fueling the frenzy.
The media also contributed to the chaos by reporting on the situation. Ryan Falvey, an investor at venture capital firm Restive Ventures, noted that spreading the message to withdraw funds from SVB was akin to yelling “fire” in a packed theater.
Despite SVB being well-capitalized, its collapse was inevitable due to the actions of the Fed and the panic that ensued. The Federal Deposit Insurance Corporation (FDIC) has taken over all SVB deposits and assets and will manage the new Bridge Bank.
Customers will be able to withdraw their money starting March 13th, and taxpayers will not bear any losses related to Silicon Valley’s downfall. This collapse mirrored the bankruptcy of Silvergate, which preceded SVB’s downfall and served as its catalyst.
Signature Bank New York
Signature Bank, established in 2021, is the most recent addition among the banks discussed in this article. It holds an intermediate position in terms of assets, sitting between Silvergate and SVB, with over $110 billion in total.
However, the bank’s focus is not primarily on cryptocurrencies, unlike Silvergate. It only began dealing with them in late 2018, accounting for approximately 23% of all deposits. Nevertheless, Signature aims to decrease this percentage to 15%.
Unlike the previous two banks, Signature’s history took a different turn. When news of SVB’s closure broke, numerous customers began calling Signature offices, concerned about the safety of their funds.
The commotion was due to many customers holding accounts exceeding $250,000, with FDIC only guaranteeing refunds for this amount. Consequently, withdrawals surged, but the situation stabilized by March 12.
Unexpectedly, Signature announced its closure. Company managers were taken aback. However, it was later revealed that nearly 90% of its total deposits of $79 billion were unsecured, and $16.52 billion was in digital assets.
As a result, authorities cited “systematic risks” as the reason for Signature’s closure. US Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, and Federal Deposit Insurance Corporation (FDIC) chairman explained that “the decisions made should protect the US economy by boosting people’s confidence in our banking system.”
FDIC will take over Signature and transfer all deposits and assets to Bridge Bank. All clients will have access to their funds.
Unlike the previous two banks, Signature’s closure was not of its own volition. Throughout this period, Signature’s shares fell, with a nearly 33% decrease in price since March 8.
Source: tradingview.com
And what impact will the fall of the three major crypto-related banks have on global markets and economies?
Impact on markets Let’s start with the impact on digital assets.
For example, consider the daily chart of bitcoin.
Source: tradingview.com
On March 8, BTC fell 2.23% when Silvergate was declared bankrupt. It is assumed that the effect was delayed since on March 9, the decline was even greater at 6.16%.
However, the reaction to the collapse of SVB on March 10 was only 0.72%, indicating a neutral response. On the other hand, the news about the termination of Signature Bank’s activities was met with almost 10% growth, indicating a positive response.
These different reactions suggest that there is no direct dependence between banking failures and the crypto industry.
Moreover, investors are becoming more relaxed each time there is a banking failure, indicating that the problem lies in the banking sector as a whole, rather than the crypto industry. This is due to inflation caused by the launch of the printing press.
Investors in fear of a recession and banks seek to withdraw money, but keeping them on hand is not the right way to deal with inflation. Hence, the option with BTC turns out to be relatively good and reduces the risks of depreciation of savings.
However, there may be temporary difficulties with liquidity in the crypto markets. Solutions like Silvergate’s SEN and Signature Bank’s Signet were convenient for institutional investors because they didn’t have to pay commissions to third parties.
As for the future of the crypto world and the banking system, they will exist as before. Cryptocurrencies survived the collapses of MtGox, Terra and FTX, and banks survived the loss of Lehman Brothers Holdings. Hence, new bankruptcies are a natural process that can cause short-term declines, but sooner or later growth will begin.
It is important to note that this material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals, and experts.