Another massive crypto-centric firm bit the dust this week, leading some analysts to forecast bigger problems for the overall ecosystem.
Silvergate Capital, a publicly traded crypto bank, announced Wednesday that it would “wind down operations and voluntarily liquidate” its bank division.
The news from the California-based firm followed a run that resulted in it selling off assets at a huge loss to cover over $8 billion in withdrawals amid the broader crypto ecosystem meltdown.
“It is not the first bank to get the collywobbles,” Katharine Wooller, business unit director at Coincover, said to TechCrunch. “Ultimately the risk/reward ratio, in the face of increasing scrutiny, was not viable, as the ongoing crypto winter, worsened by the FTX scandal, shows no sign of thaw.”
As the company waves goodbye to its almost 10-year crypto experiment, it points to a bigger issue for the ecosystem. The institution, which was one of the few banks that acted as an intermediary in the space of institutional crypto, is yet another victim of the “crypto winter” following the implosion of FTX, which used the bank to transfer customer funds.
Although the news feels big, “market participants seem to be shrugging this off,” according to Julius de Kempenaer, senior technical analyst at StockCharts.com. The number of providers for the crypto ecosystem is shrinking, which could become a bigger problem if this trend continues, he added.
Some may be brushing it off, but traders haven’t; Silvergate’s stock was down 27% day on day to $3.59 per share as of midday Thursday.
“Silvergate’s collapse is the logical consequence of what we have seen in the last few months,” Carlo Alberto de Casa, market analyst at Kinesis Money, said to TechCrunch. “After the FTX scandal, over 60% of Silvergate’s deposits fled the company in only three months, with losses for the bank that surpassed $1 billion last quarter.”
FTX and other companies related to former FTX CEO Sam Bankman-Fried accounted for roughly $1 billion of the bank’s deposits. So when FTX crumbled in November, it took a blow, but still managed to survive for a number of months after selling off part of its traditional banking operations and branches.
During that time frame, a large number of players stopped to use the bank, including Coinbase, Galaxy Digital, Crypto.com and Paxos, Casa noted. “The departure of Silvergate could push more funds to offshore markets, increasing the notable liquidity problem of the cryptocurrency system.”
The loss of Silvergate could also make it harder for investors to participate in the space, and “it is certainly not going to strongly push traditional firms to servicing crypto,” de Kempenaer noted. “And this comes on top of probably the most important problem for crypto, which is ‘trust.’”
Crypto firms’ ability to access mainstream banking has “long been its Achilles’ heel,” Wooller said. “Without a method to onboard customers, who will need to switch safely and easily between fiat and cryptocurrencies, the digital asset industry will be essentially hamstrung.”
While crypto offers a potentially faster, more efficient way to move value, it’s not viable if there’s no interoperability with the current banking infrastructure, Wooller added.
“Very few pension funds, endowments [and] semi-government institutions will be investing in crypto when they risk losing everything because of a collapse of their service providers or the exchange they are trading on,” de Kempenaer said.
It has been four months since the FTX collapse, but the cataclysm continues to highlight issues in the crypto industry as bad players run “amok due to lack of regulatory oversight and the risk of significant contagion,” Wooller said.
While these issues are indicative of a maturing market, there are crypto businesses and regulators watching the space that want to “do the right thing,” Wooller added.
“Against a background of flourishing tech providers in the AML, KYC and insurance space, plus increased dialogue around central bank digital currencies, there is only so long until the crypto winter yields to sunnier days for the digital asset industry,” she added.