Silvergate’s Demise Opens Door For Signature And Kraken

In January, we wrote about premier crypto bank Silvergate’s many problems. The TLDR of that story was that Silvergate had gone from one of crypto’s greatest success stories to the precipice of disaster following the FTX collapse.

The numbers at the time were anything but pretty:

• A $200 million lost investment in Meta’s Diem stablecoin project

• A drop in customer deposits from $12 billion to $3.8 billion

• A $718 million loss from selling assets to cover the massive withdrawals

As a result, Silvergate cut nearly 40% of its staff, and watched its stock drop 44% in a month. To conclude, we said that the company looked to be “closer to the grave than the promise land”.

Oh, how right that statement turned out to be.

Since then, things have gotten much worse for the embattled bank, and it now looks like a collapse is a matter of when, not if.

Delays And Cuts

Things started to really hit the fan for Silvergate on March 1st.

That was when the bank was supposed to release its annual fiscal report. But, it never came. Instead, Silvergate filed for a 2-week extension, citing regulatory scrutiny and larger-than-expected losses. As a result of these investigations and losses, Silvergate’s ability to operate going forward was a “going concern”.

To sum it up, the extension was another way of Silvergate saying, “we might be screwed”.

And both the market and Silvergate’s partners took notice.

The stock dove 55% following the announcement. The selling spree was coupled with Coinbase, Paxos, Circle, and Galaxy Digital all cutting ties with the bank.

Bye Bye SEN

As if delaying its earnings report and losing all its major clients wasn’t bad enough, on Friday, Silvergate decided to shut down the Silvergate Exchange Network (SEN).

Most people have never heard of Silvergate's SEN, but it was crucial for the crypto ecosystem's "fiat problem". When individuals go to buy bitcoin or other cryptoassets, at some point they have to interact with the traditional banking ecosystem. This is a problem you have probably never thought about, but trust us that it's a big deal. Behind the scenes there needs to be an "on ramp" to get your fiat onto an exchange.

Silvergate's SEN solved this problem by providing banking services to exchanges and other crypto companies. This allowed their clients to instantly move large amounts of money all seven days of the week.

As one of the only companies that provided this service, Silvergate had become a piece of core infrastructure for crypto. But without SEN, crypto companies simply won't stay with Silvergate. And, until a replacement service is found, liquidity might get a lot tighter, making it more difficult for institutions and clients to make trades.

One Door Closes, Another Opens

So, now that Silvergate is on the fast lane to the shadow realm, the question becomes, where do the major institutions go for their banking needs?

One popular answer is Signature Bank (SBNY), which is where LedgerX and Coinbase now call home. It’s an odd turn of events for Signature, which began the year attempting to pivot away from crypto. But, with its main competitor now underwater, digital coin services probably look awfully attractive again.

For the crypto industry, there are good reasons to be optimistic about Signature.

• The bank is much larger than Silvergate, boasting ~$115 billion in total assets versus Silvergate’s ~$11 billion

• Signature is significantly more diversified (with only ~20% crypto exposure vs ~100% for Silvergate)

• And, to top it off, the bank doesn’t make crypto-backed loans and has a long history with regulators

All of these factors lend hope that Signature can survive the crypto winter.

Another possible answer is Kraken’s new bank, which is scheduled to launch very soon. The advantage here would be that the bank would inherently be crypto-native. In theory, if anybody knows how to run a successful crypto bank, it would be people who have been in crypto for over a decade now.

Regardless of whether it’s Signature, Kraken, or someplace else, the crypto industry desperately needs a reliable banking option. Without it, liquidity will get worse, retail traders will suffer, and the narrative behind “institutional adoption” would lose a ton of momentum.

Needless to say, there’s a lot on the line here. Let’s hope a solution can be found soon.