The shutdown of crypto bank Silvergate Capital (NYSE:) appears to have been the final domino drop in the FTX plunge. While its fall had little impact on the cryptocurrency market’s crackdown on FTX, the problem persists. Where to get liquidity to feed the fiat-cryptocurrency railway?
Explanation of the disappearance of Silvergate
Prior to the Sam Bankman-Fried FTX crash, Silvergate’s September assets were $11.9 billion. In November, Silvergate CEO Alan Lane assured investors that Silvergate has limited access to FTX, representing less than 10% of deposits, with no loans or other investments in FTX.
However, the bank issued SEN Leverage loans exclusively guaranteed. Like any other bank, Silvergate used SEN leverage to lend to customer deposits in exchange for an interest rate. At the end of 2022, Silvergate’s SEN leveraged $1.1 billion in such liabilities.
However, the most significant risk came from the bank’s accumulation of securities in bonds, treasuries and mortgage-backed securities. This coincided with the exit after the FTX crash, where Silvergate’s deposits fell from nearly $12 billion to $3.9 billion in December.
The latest blow appears to have been a $4.3 billion Silvergate loan to San Francisco’s Federal Home Loan Bank (FHLB) to facilitate withdrawals. The problem is that the early-than-expected withdrawal of the FHLB loan caused Silvergate to sell its titles prematurely.
This resulted in a realized loss with a total net loss of $1.05 billion for . Fast forward to March 1 and the Silvergate 10-K late filing with the SEC. The bank cited the FHLB redemption as the main culprit due to “the sale of additional investment securities in excess of what was previously expected.”
- Silvergate price drop in a month
Photo credit: Trading View
In the following days, this situation provoked a new run on the banks. In addition, all major Silvergate customers have abandoned the SEN ship: Coinbase (NASDAQ:), Paxos, Circle, Binance.US, Gemini, and Galaxy Digital. Silvergate finally announced its liquidation on Wednesday, and the USD payout bar for SEN has been lowered.
Cryptocurrency liquidity is low
Two key mechanisms contribute to the growth of the cryptocurrency market:
- Sending fiat currency directly to a centralized exchange for buying and selling cryptocurrencies. Essentially, the exchange needs a cryptocurrency bank like Silvergate for fiat currency flows.
- Convert fiat currency to stablecoins, then send them to an exchange to buy and sell cryptocurrencies. If a stablecoin is centralized, its issuer needs a crypto-friendly bank to hold stablecoin reserves at a 1:1 ratio.
Now that Silvergate does not work with the SEN payment system, the liquidity of the cryptocurrency market will undergo a significant restructuring. We are already seeing US stock exchanges suffer compared to international stock exchanges.
- Fewer buy and sell orders result in shallower market depth
Photo Credit: Kaiko
Along with declining market depth, USD dominance continues to decline rapidly in favor of the offshore stablecoin.
- USDT – dollar, but without the liability of US regulatory repression
This indicates an increase in the use of stablecoins. Over the past week, USDT’s market capitalization has increased by $3.4 billion and its share has increased by $2.1 billion. Interestingly, USDC, which is jointly managed by Coinbase and Circle, briefly dropped $0.77 billion last week, likely due to the US authorities cracking down on Binance USD () stablecoin.
On the other hand, the market capitalization of offshore USDT is constantly increasing. Similarly, with Binance focusing on TrueUSD(), the stablecoin’s market capitalization has increased by 37% in the last month, from $948 million to $1.3 billion.
What seems to be happening is a throwback to the early days of cryptocurrencies. The heightened activity of the US regulatory system is strongly reminiscent of Operation Chokepoint 2.0, the original version of which was deployed to shut down online casinos during the Obama administration.
Regardless of the veracity of the assumptions, this leads to more attention being paid to international stablecoins, rather than those dependent on US institutions.
This will inevitably spur demand for algorithmic stablecoins. An example is the Djed stablecoin, which is pegged to the dollar but over-backed by the blockchain cryptocurrency.
still highly dependent on USDC through a multi-collateralized proxy that is 25% guaranteed by USDC. However, the US crypto ecosystem is likely to be dominated by USDC, which BlackRock already backs. This is the same $10 trillion asset manager that the Federal Reserve hired in 2020 to structure its response to inflationary stimulus, which the central bank is now trying to offset by raising interest rates.
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