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Silvergate Collapses - What Implications Does This Have?

GB Market Commentary 09/03/2023

by Marcus Sotiriou


Bitcoin dropped further this morning, as investors are concerned about the consequences of Silvergate’s collapse.


I think this could have significant implications for crypto regulations in the US and banks’ ability to deal with digital asset platforms and cryptocurrency brokerage firms. This is due to the narrative of crypto causing the problem, which certain politicians are trying to portray.


Yesterday, Senator Sherrod Brown, Chair of the Senate Banking Committee, said, “As the impact of FTX’s collapse continues to ripple outward, today we are seeing what can happen when a bank is over-reliant on a risky, volatile sector like cryptocurrencies.” In addition, Senator Warren said yesterday, “As the bank of choice for crypto, Silvergate Bank's failure is disappointing but predictable. Now, customers must be made whole & regulators should step up against crypto risk.”


What these Senators fail to realise though, is that Silvergate’s demise was not a crypto problem. Silvergate’s collapse was due to $13.3 billion of demand deposits, that depositors could withdraw in minutes, supported by only $1.4 billion of cash. As opposed to being a crypto-related problem, it was clearly due to Silvergate not having enough cash leading to the lack of capital from the bank run. At cryptocurrency brokerage firms, such as GlobalBlock, these issues are not even possible.


Silvergate operated on fractional reserves, like every other bank, and the loss of consumer confidence which was exacerbated by a Senator letter to politicians on social media. This undermined public trust in Silvergate, which catalysed its downfall.


​In this case, Silvergate was denied due process, as there is a clear agenda, in my opinion, against the crypto industry from US politicians. We could well see crypto infrastructure companies and cryptocurrency brokerage firms move offshore because of this approach. We are in fact already seeing this happen at the moment. Just over a week ago, an NFT project, called KDean, partnered with a centralised, off-shore crypto casino to encourage NFT leveraged debt. With the recent US actions, this could just be the start of consumers using offshore platforms for crypto activities.


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