Silvergate Bank held reserves for Stablecoins. The assets have taken flight.
Stablecoins are meant to be the bedrock of the crypto market, sticking faithfully to the dollar even when tokens like Bitcoin fluctuate wildly in value.
But until recently, some reserve funds backing stablecoins were held at Silvergate Capital (SI), a bank now struggling to stay afloat. That raises concerns about whether some stablecoins could have been at risk of not being fully backed and what protection investors would have if a bank failed, experts say.
Until recently, some major token issuers said they sometimes held at least part of their reserves at La Jolla, Calif.-based Silvergate. The bank said this week it would delay filing its annual report and warned about its ability to “continue as a going concern.” The disclosure, made in a securities filing late Wednesday, sent the stock tumbling more than 55% to $5.77 by Friday’s close.
Token issuers say that for each token, there is at least as much in reserves held in safe assets such as government bonds and cash deposits. Major coins include those issued by Tether Holdings, Circle, Paxos Trust Co. and Gemini Trust Co.
Most coin issuers held reserve deposits at Silvergate, although they appear to have pulled out in recent days.
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Reserve reports from Paxos, which issued stablecoins USDP and BUSD, included Silvergate among the banks it used as of February 28. As of March 3, none of the reserves for those coins were held at Silvergate, a person familiar with the matter said.
Until this week, the website of Gemini, the trading platform founded by the Winklevoss twins, said part of the reserves backing its stablecoin, called GUSD, could be held at Silvergate, among other banks. On Thursday, Gemini tweeted“We currently have zero customer funds and zero GUSD funds at Silvergate.”
A spokesperson for Tether, the largest stablecoin at $73.2 billion, said in a statement that the company “has no exposure to Silvergate. Our reserves remain liquid and unaffected.”
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One company that still had deposits on Silvergate as of midday Friday was Circle, the firm backing USDC, the second-largest stablecoin at $43.3 billion, according to a statement a spokesperson provided to Barron’s at the time. Friday night that was no longer the case.
“Circle’s top priority is the protection of reserve funds that support USDC. As a result of ongoing uncertainty at Silvergate Bank, Circle has today moved the small percentage of USDC reserve deposits held at Silvergate to our other bank partners,” the company said in a blog post late Friday .
Regulators, already wary of banks’ crypto activities, are likely to pay even more attention to deposits of stablecoin reserves now that Silvergate has shown that those deposits can flee at a moment’s notice, said Todd Phillips, a former senior attorney for the Federal Deposit Insurance Corp. . (FDIC).
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“It shows that these assets are very volatile,” Phillips said. “It’s very easy for these stablecoin issuers to pick up and take large amounts of money out of one bank and put it in another.” Banks may need more liquidity to deal with a rapid withdrawal of stablecoin reserves now that it’s clear these companies can up and run, he adds.
A spokesperson for Silvergate declined to comment.
It is unclear how stablecoin holders would be affected if a company holding reserves went under. The FDIC typically insures deposits up to $250,000, but in many cases this limit applies to the coin issuer rather than each token holder.
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Some issuers on their websites say that some token holders may be protected by “pass-through” FDIC insurance at the individual level, which could mean they get the full $250,000 worth of protection. Gemini, for example, says the cash portion of its reserves “could be eligible” for its own clients if the bank holding them failed.
However, for the pass-through assurance to be available, token issuers would need sufficient information about who held each stablecoin that the issuer could show the FDIC, and investors cannot be sure whether an issuer meets this requirement in advance, Phillips says.
“The FDIC is not going to look at these records until the bank fails,” says Phillips.
Other experts also question whether FDIC insurance will kick in. “Just because you say these coins are FDIC-insured doesn’t necessarily make it so,” says Lee Reiners, policy director at the Duke Financial Economics Center. “Honestly, it’s hard for me to understand how any stablecoin would qualify for pass-through insurance.”
An FDIC spokesperson said the agency “cannot discuss any open and operating institutions.”
Write to Joe Light at [email protected]
