What does Silvergate’s shutdown mean for the crypto industry? (NYSE:SI)

Cryptocurrency-friendly lender Silvergate Capital (NYSE:SI) is crumbling, and it’s “definitely not good for the crypto industry,” said Konstantin Shulga, CEO and co-founder of institutional crypto-liquidity marketplace Finery Markets.

Silvergate (SI), the bank which had ties to Sam Bankman-Fried’s failed crypto exchange FTX (FTT-USD), has become the latest victim of the prolonged market downturn, after revealing plans to liquidate operation and voluntarily liquidate.

Before that decision, the 35-year-old San Diego, Calif.-based company, which posted a $1 billion loss in the fourth quarter, said about two weeks ago that it was forced to assess its ability to continue as a going concern, prompting an exodus among its institutional clients, including Coinbase Global (COIN) and Galaxy Digital (OTCPK: BRPHF ). Silvergate ( SI ) then said it would discontinue the Silvergate Exchange Network, its crypto payment platform, which was rolled out in 2018 to enable instant, 24/7 transfers between market participants and crypto exchanges and quickly grew to become one of the most important growth. drivers.

What was once a $200 share at the end of 2021 — the same year bitcoin (BTC-USD) hit all-time highs — is now less than $3 as Silvergate ( SI ) saw its customers rush to cash out from bank following the November collapse of FTX (FTT-USD) and its sister trading firm Alameda Research, both of which reportedly had accounts at Silvergate. The Justice Department last month reportedly began investigating Silvergate’s relationship with Bankman-Fried’s crypto empire.

Things could be even worse if it didn’t have $4.3 billion in short-term advances from the Federal Home Loan Bank at the end of 2022, in addition to the roughly $4.6 billion it had in cash. At the start of the process of phasing out the banking business, “it is difficult to know what the final outcome and timeline of this process will be,” KBW analyst Michael Perito wrote in a note to clients last week.

Before its demise, Silvergate (SI) was a key player in providing crypto-related banking services, but the financial contagion from the FTX (FTX-USD) debacle tarnished its once-mighty reputation.

“The Silvergate case is special as the bank lost money not by making risky over-the-counter loans against crypto-security (as in the case of 3AC, Celsius or the FTX collapse), but by doing regular banking,” Shulga told ICS-digital in a recent interview, citing the additional securities it sold at a loss so far in 2023 to finance the outsized run on deposits.

In turn, “a downward spiral of rapidly deteriorating capital adequacy ensued, leading to more customer withdrawals,” he added. “It’s definitely not good for the crypto industry, and this could potentially mean a certain trend towards crypto moving outside the US, at least until a more comprehensive regulatory framework is established in the US. Increased clarity on rules and regulations will actually increase the number and quality of banking relationships for crypto firms, as the industry is here to stay regardless of what happens with Silvergate.”

While Seeking Alpha contributor The Digital Trend expects “drastic” effects in the crypto space from Silvergate’s (SI) fall, “knowing how resilient the crypto space and community is, there will be a rise from the ashes, and alternative payment ‘rails’ will be sought .”