Cryptos go to bank collapsed. What now?

New York (CNN) Yesterday, the financial world witnessed a classic run on the bank when Silvergate Capital, the US lender to crypto companies, said it would wind down operations and voluntarily liquidate.

ICYMI: Silvergate was, for most of its existence, a traditional Southern California regional bank. But by 2018 it had moved to crypto, recognizing that young digital asset firms were struggling to establish relationships with larger mainstream banks. Silvergate positioned itself as a conduit for these new companies that other institutions viewed with a mixture of skepticism and disdain. It was a pretty smart business move at the time. But Silvergate went all in on crypto, leaving itself overexposed in the crash that began last year.

As Bloomberg’s Max Reyes writes:

“Having hitched the wagon so firmly to the new crypto world, the bank had exposed itself to an old-fashioned banking risk: When the industry’s outlook worsened, Silvergate had little else to lean on.”

The bank’s shares have cratered 98% from their peak in November 2021. In the same period, the global crypto industry has lost two-thirds of its value, falling from a market cap of $3 trillion to $1 trillion.

BIG PICTURE

If you’re in the crypto business right now, you’re working under a long, dark shadow cast by Sam Bankman-Fried, the entrepreneur who became a pariah when his crypto empire collapsed last year. That event triggered a rash of bankruptcies and put the entire industry on alert.

If traditional financiers and regulators saw crypto as something of a nuisance before, FTX’s collapse and the criminal charges that followed made the market radioactive. The closer you were to FTX, the more trouble you could be in.

“There’s an old saying — ‘if you go to bed with dogs, you wake up with fleas’ — and that’s what happened with Silvergate,” said John Reed Stark, an outspoken crypto critic and former head of the SEC’s Office of Internet Enforcement. The Wall Street Journal. He described Silvergate’s collapse as a “catalysmic event for the crypto industry.”

To be sure, Silvergate has not been accused of wrongdoing because of its ties to FTX, but the bank acknowledged it had been investigated by regulators and the Justice Department.

MY TWO CENTS

Cards on the table: I am neither pro- nor anti-crypto. I’m skeptical of it in the same way that I’m deeply skeptical of (and fascinated by) pretty much anything that involves large sums of money and zeal.

In the fallout from Silvergate, bullish analysts predictably point to how overexposed the bank was to a single industry, how it had lousy risk management, etc. – all to avoid blaming crypto.

“Silvergate’s demise was not a crypto problem,” said Marcus Sotiriou, an analyst at digital asset broker GlobalBlock. “Silvergate’s collapse was due to…not having enough cash, which led to a lack of capital from the bank run.”

And yes, 100% — Silvergate should have diversified instead of putting all its eggs in the crypto basket, which is universally perceived as a basket full of spikes and broken glass subject to violent fluctuations.

But also… there is a reason why the dense network of crypto giants flocked to Silvergate. Other, better managed banks did not have the stomach for it.

I’ve heard the “don’t blame crypto” argument a thousand times. When FTX imploded, it wasn’t crypto’s fault – it was one bad apple, an old-fashioned scam. And it was the same story almost a year ago, when the Terra/Luna crash last spring wiped out billions overnight — not crypto’s fault; they were toxic algorithmic stable coins, you can’t trust them. And ditto when Celsius, Voyager and Three Arrows all went up in the “crypto winter” of 2022 — we can’t help that the regulations allow unscrupulous actors to dupe well-intentioned investors…

There is a kernel of truth to all these stories, but as the crypto dominoes continue to fall, the through line becomes harder to ignore.

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