The Benefits for Stablecoins from the Collapse of Silvergate Capital.
Silvergate Capital, a crypto bank, has recently shut down, adding to the growing list of troubles faced by the crypto market, particularly in terms of liquidity for fiat-to-crypto transactions. While the impact of Silvergate’s closure was not as significant as that of FTX’s, the underlying issue remains unresolved.
The reason behind Silvergate’s downfall can be traced back to its association with FTX, which collapsed in September 2022, leading to a significant drop in Silvergate’s assets. The bank’s CEO, Alan Lane, had earlier assured investors that the bank had limited exposure to FTX, accounting for less than 10% of deposits, without any loans or other investments. However, Silvergate had issued SEN Leverage loans, which were exclusively collateralized by Bitcoin, accounting for $1.1 billion in commitments by the end of 2022.
Furthermore, Silvergate had accumulated securities in bonds, treasury securities, and mortgage-backed securities, making the bank more vulnerable to market fluctuations. When FTX crashed, Silvergate’s deposits shrank from nearly $12 billion to $3.9 billion in December, leading to a significant loss for the bank.
The final blow came in the form of a $4.3 billion loan from the Federal Home Loan Bank (FHLB) of San Francisco, which was recalled earlier than expected, causing Silvergate to sell its securities prematurely, resulting in a net loss of $1.05 billion for Q4 ’22. In March 2023, Silvergate finally filed a delayed 10-K report to the SEC, attributing the repayment of the FHLB as the primary reason for the loss.
- In conclusion, the closure of Silvergate Capital highlights the need for the crypto market to address the liquidity issue for fiat-to-crypto transactions and the potential risks associated with investments in the market.
- Firstly, sending fiat money directly to a centralized exchange to purchase or trade cryptocurrencies requires the assistance of a crypto bank like Silvergate to facilitate the flow of fiat currency.
- Secondly, converting fiat money into stablecoins, which are pegged to a specific fiat currency, and then using them to purchase or trade cryptocurrencies on an exchange. However, if the stablecoin is centralized, its issuer needs the support of a crypto-friendly bank to maintain the reserve of the stablecoin in a 1:1 ratio.
