Signature Bank, Stablecoins May Benefit From Silvergate Bank Crypto Exchange Network’s Demise

It wasn’t really crypto, and it wasn’t really a network. But the program at Silvergate Bank called the “Silvergate Exchange Network,” or SEN for short, played a crucial role behind the scenes in facilitating off-blockchain money transfers between major investors and crypto exchanges.

Now the network has been shut down — shut down last week when the bank’s parent company, Silvergate Capital Corp., acknowledged there were questions about its ability to continue as a “going concern” and that it would be late in filing an annual report with securities regulators. Even before the announcement, key users of SEN, including crypto firms Coinbase, Gemini, Paxos, Circle, Galaxy Digital, Cboe Digital and Bitstamp, already dropped out, citing the need for caution.

Kraken, a crypto exchange, tweeted Tuesday that “we are ending our relationship with Silvergate,” taking steps to ensure that “customer and operating cash is safe and secure.”

With no clear prospect of a SEN reboot anytime soon, analysts and industry professionals are trying to estimate how valuable the network really was as a core part of the nascent crypto market infrastructure, and whether other blockchain firms or even traditional banks might step in. to fill the void.

“It’s hard to know how damaging the loss of SEN would be right now,” said Noelle Acheson, former head of research at CoinDesk and Genesis Trading. “I suspect it was probably a low fraction of what it used to be, so the immediate impact isn’t that great. It’s more of a regrettable removal of a practical service.”

Silvergate launched SEN in 2018 and had seen significant adoption of the platform, with transaction volume reaching $100 billion in fall 2020. Virtually all major US-based crypto exchanges became customers of Silvergate and began moving money through the network.

SEN was not really an interbank network per se like SWIFT (Society for Worldwide Interbank Financial Telecommunication) or Fedwire, two well-known money transfer services used by banks. Rather, it was a collection of accounts at Silvergate, long seen as a crypto-friendly bank, that were able to instantly transfer money between each other.

So if an institutional investor had an account with Silvergate, sending dollars to an exchange was as easy as making an internal transfer to the exchange’s account with Silvergate. The functionality was available 24 hours a day, seven days a week, 365 days a year.

Naturally, the SEN business served as a marketing tool to entice crypto firms to park deposits at Silvergate.

“It was a significant convenience for crypto customers, in that it drew traditional banking into crypto hours,” Acheson said. “Instead of waiting for banking hours on weekdays, customers can transfer fiat 24/7/365, much like the way crypto markets work.”

At its market peak, in the fourth quarter of 2021, SEN had grown to process over $219 billion in transfers, generating $9.3 million in revenue.

It goes without saying that the amounts fell during this year to fourth-quarter levels of $117 billion and $6.6 million, respectively, as digital asset prices fell and the industry entered crypto winter.

While it remains unclear what will happen to Silvergate Capital ( SI ), there are several options for the now-shuttered network, according to analysts and experts.

Signature Bank, another crypto-friendly bank based in New York, offers a program called Signet, launched in 2019 and using blockchain technology to allow real-time settlements. It is the only other banking alternative to SEN that allows instant US dollar transfers to exchanges – as of now.

CEO Oliver von Landsberg-Sadie of cryptobanking firm BCB Group said in an interview with CoinDesk on Monday that the company’s payment processor is accelerating plans to add US dollar capabilities to fill the gap left by SEN. (Currently it trades in euros and British pounds, but not in dollars.)

“I’d like to say it could be live by spring, so we’ll do whatever it takes to ensure that those stranded by special education have some sort of continuity given the huge overlap of BCB and Silvergate customers,” Landsberg-Sadie so.

Other traders will likely revert to using stablecoins such as Circle’s USDC or Tether’s USDT to make quick trades; the dollar-pegged tokens are usually easy to move around on the so-called digital rails.

A Kaiko report on Monday said “stablecoins are likely to become even more ubiquitous among traders,” with the “death” of SEN.

With Silvergate on the brink, the institution could be acquired by another bank, possibly with the assistance of the Federal Deposit Insurance Corporation (FDIC). Should that happen, the acquiring bank can choose to restart the SEN, or simply leave it alone.

“Unless they’re a bank that already operates in a crypto market, the likelihood is they won’t want to set up a crypto business based on what Silvergate had,” said Dick Bove, chief financial officer at Odeon Capital Group.

For crypto traders, the technology seemed to have been a game changer and a practical bridge between traditional finance and the crypto ecosystem, enough that the industry could find ways to keep it alive despite the shutdown of SEN.

“I don’t know how unique the technology is,” said Dave Weisberger, CEO of CoinRoutes. “What I can categorically say is that the functionality it offered will continue to be delivered and from multiple sources.”

“There are a lot of other people who are ready to jump into the breach,” he said.