Crypto’s bedrock bank is imploding

The implosion of Silvergate Bank is an existential event for what is left of the crypto ecosystem. Silvergate underpinned almost every US crypto company; without it, it is hard to see how the industry can thrive.

If Silvergate did not exist, it would be impossible to invent it – regulators would not have allowed the creation of one de novo cryptobank in the past, and they certainly don’t seem to be doing so in the future.

The big picture: Pretty much all crypto is based on a fundamental assumption that various coins, including bitcoin, are worth money. That is, they can be traded, in meaningfully large quantities, for real dollars.

• For that to happen, crypto companies like Coinbase need a place to hold dollars. For most American crypto companies, this place was Silvergate Bank, both because it was very friendly to the industry and because very few other banks wanted to bank such operations.

Where it says: Now that Silvergate has announced that it is going into voluntary liquidation, there is no other American institution that can realistically take its place. Silvergate’s only real competitor in the space, Signature Bank, has already announced that it is deliberately – and rapidly – ​​reducing its crypto-related deposits, rather than trying to increase them.

• Banking regulators have repeatedly made it clear they don’t trust crypto and are unlikely to smile on banks embracing the industry. There is a reason why no major savior has stepped in to save Silvergate, or at least take over its formerly valuable banking relationships.
• Even Silvergate only really managed to achieve its position as a regulated crypto bank through historical accident. It was founded in 1988, long before any cryptocurrencies were invented, and the crypto business, which started in 2013, grew organically in a way that was difficult for regulators to prevent.

Reality check: Many crypto companies, including the largest crypto firms in the world, have found it almost impossible to meaningfully incorporate in the US at all.

• However, basing themselves in friendlier foreign jurisdictions does not mean they are beyond the reach of US regulators.
• The dollar is internationally ubiquitous, and wherever there is a dollar, US financial regulators are not far behind.

Between the lines: The true crypto believers tend to distrust regulators and the dollar. But that, in turn, only reinforces the supervisory authorities’ inclination to get involved.

What they say: “In the absence of regulatory compliance, clients do not have the information they need to assess and mitigate risk,” Michael Barr, deputy chairman for supervision at the Federal Reserve, said Thursday.

• “Investors do not have the structural protections they have relied on for decades. As a result, many have fallen victim to classic cases of fraud and abuse.”

Bottom line: Crypto will remain little more than a financial outpost in the Wild West in the absence of a smooth and reliable connection to the US financial system. Silvergate was that connection. Now it’s gone.