The crypto-friendly bank has fallen within a week, how should the crypto industry alleviate the liquidity crisis?

Author: zf857.eth, R3PO

Silvergate and SVB Collapse the Crypto Industry

After a tumultuous year, Silvergate Bank's parent company, Silvergate Capital, announced last Wednesday at the close of U.S. stock markets that it would orderly cease operations of Silvergate Bank and voluntarily liquidate its assets in accordance with regulatory procedures.

The demise of Silvergate has spread to more traditional financial institutions, triggering a larger liquidity crisis. On March 8, one of the oldest and crypto-friendly banks, Silicon Valley Bank (SVB), announced it was in financial distress. Last Friday, the California Department of Financial Protection and Innovation announced it had officially closed SVB, and the Federal Deposit Insurance Corporation was appointed as the bank's receiver, taking control of its deposits. This marked the official collapse of the bank, becoming the largest bank failure in the U.S. since the global financial crisis. More small and medium-sized banks are losing their footing amid the Federal Reserve's interest rate hikes.

The collapse of SVB has triggered panic among global investors, with many prominent blockchain venture capitalists holding over $6 billion in assets at SVB. Despite the U.S. government's intervention, promising that SVB depositors could retrieve their funds, the equity and debt values of crypto banking entities have nearly been wiped out. On November 16, 2022, Block.one and its CEO collectively held about 16.8% of Silvergate's shares, currently theoretically facing a loss of over $70 million on their Silvergate stock investment.

The demise of SVB and Silvergate, both members of the Federal Reserve System, has also caused many ripple effects in the cryptocurrency ecosystem, leading to a crisis of trust. The uncertainty surrounding Circle, the issuer of the USDC stablecoin, with $3.3 billion in deposits at SVB, caused USDC to depeg over the weekend, dropping to a low of 0.889.

R3PO previously analyzed and predicted this in the January article “The Tragedy of Crypto-Friendly Banks: Silvergate's Explosion and Abra's Misfortune”, mentioning that 2023 could be the end for more crypto-friendly banks.

Signature Bank - The Second Financial Institution Closed After SVB

U.S. regulators announced last Sunday evening the closure of Signature Bank, a regional bank headquartered in New York. The U.S. Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation stated in a joint announcement: "We also announce that New York's Signature Bank has similar systemic risk exceptions and was closed today by its state-chartered agency."

Signature Bank had already reduced its exposure to the cryptocurrency market but still could not escape disaster. Since February 1, 2023, it no longer supports any cryptocurrency exchange clients trading below $100,000, applying to all cryptocurrency exchanges. This statement confirmed Signature Bank's determination to reduce its exposure to the crypto asset market, as it would only handle transactions over $100,000 for Binance. In December 2022, Signature Bank also stated that after the FTX explosion, the bank had withdrawn from the cryptocurrency sector on a large scale, intending to cut up to $10 billion in customer deposits related to crypto assets. On March 2, Signature Bank reiterated in its quarterly report that it currently does not lend against crypto collateral, does not invest in digital assets, and does not custody digital assets for any clients.

But why was Signature Bank still shut down by regulators? According to the Wall Street Journal, as early as January, the Federal Home Loan Bank System (FHLB) provided over $13 billion in loans to the two largest cryptocurrency banks, Signature Bank and Silvergate, to mitigate the impact of a liquidity crisis caused by a surge in withdrawals. It is reported that this entity provided nearly $10 billion in loans to Signature Bank in the last quarter of 2022, becoming one of the largest borrowing transactions in the banking industry in recent years. Additionally, Silvergate received at least $3.6 billion in loans from the FHLB. This indicates that the liquidity crisis of these two well-known crypto-friendly banks had already begun to emerge after the FTX explosion.

Cryptocurrency Industry Deeply Entrenched in Fiat Liquidity Crisis

First, it is worth emphasizing the Silvergate Exchange Network (SEN), which played a key role in facilitating non-blockchain fund transfers between large investors and cryptocurrency exchanges. Silvergate launched SEN in 2018, and the platform was quickly adopted, with trading volume reaching nearly $800 billion throughout 2021. Almost all major U.S.-based cryptocurrency exchanges became clients of Silvergate and began transferring funds through this network. For cryptocurrency traders, this technology seemed to change the game, becoming a convenient bridge between traditional finance and the cryptocurrency ecosystem.

As Silvergate entered voluntary liquidation last week, JPMorgan predicted that customers would migrate to Signature Bank's Signet payment network. Cryptocurrency companies could integrate the Signet network into their platforms using application programming interfaces. However, Signature Bank is currently also struggling to maintain its position.

When USDC, as the foundational asset pricing infrastructure of the cryptocurrency industry, experienced a depeg, it once again highlighted the fragility of stablecoins. When people realize that decentralized finance can still be affected by centralized financial conditions and lose value, they may consider increasing their pursuit of fiat currency. However, with the loss of these two major crypto-friendly banks, Signature and Silvergate, crypto companies have lost a key channel for obtaining fiat currency. Now, cryptocurrency companies have very few options for fiat inflows and outflows, and any new cryptocurrency company will find it difficult to obtain new bank accounts. Until new banks intervene, the fiat-crypto liquidity of the cryptocurrency industry will be severely restricted.

R3PO believes that as a nascent cryptocurrency market infrastructure, the core value of blockchain trading networks is immense. The suspension of the SEN platform and the Signet payment network will undoubtedly further harm the currently tense liquidity of the cryptocurrency market. However, for other competing banks, this undoubtedly presents a potential opportunity, as they have the chance to quickly step in to fill the gap and dominate the cryptocurrency business. Now, the only remaining crypto banks in the U.S. are Customers Bank and Sygnum, while other regions have Seba Bank, Deletc Bank, and BCB.

The Crypto Industry Actively Seeks Self-Rescue, Finding Opportunities Amid Crisis

In the spotlight, Circle today issued a statement saying: "We have 100% of our deposits at SVB safe and will open for business tomorrow. 100% of USDC reserves are also safe and reliable, and we will complete the transfer of the remaining SVB cash to BNY Mellon. As mentioned earlier, USDC liquidity operations will resume tomorrow morning when the bank opens. With the announcement of Signature Bank's closure tonight, we will not be able to process minting and redemption through SigNet, and we will rely on the settlement with BNY Mellon. We will introduce a new trading bank partner with automatic minting and redemption capabilities as soon as tomorrow. We are committed to establishing robust and automated USDC settlement and reserve operations with the highest quality and transparency."

Coinbase issued a statement saying, "Despite the recent turmoil in traditional banking, Coinbase continues to operate as usual. At Coinbase, all customer funds remain safe and accessible, including USDC conversions that will resume on Monday. All customer cash at the bank continues to be protected by FDIC insurance. Due to the FDIC's suspension of Signature's transactions, we are currently facilitating cash transactions for all customers with other banking partners."

Despite the closures of Silvergate and Signature Bank, two crypto-friendly banks, leading to the crypto capital market returning to a state before 2014—where any newly established company has no chance of obtaining banking relationships—cryptocurrency has officially become unbanked. However, the regulatory failures and financial crises of centralized financial institutions will stimulate more crypto-native capital to rely on and trust in Bitcoin and other crypto-native assets. In the future, the blockchain industry will further reduce its dependence on dollar stablecoins, broaden the universality and stability of blockchain payment networks, and increase more payment scenarios that directly use cryptocurrencies, thereby reducing reliance on centralized financial institutions. R3PO firmly believes that fully decentralized banks will inevitably emerge in the future; In Trustless we Trust.