New York (CNN) Yesterday, the financial world experienced a classic bank run as Silvergate Capital, the US lender to crypto businesses, announced it was going out of business and going into voluntary liquidation.
ICYMI: Silvergate has been a traditional Southern California regional bank for most of its existence. But by 2018 it had switched to crypto, realizing that fledgling digital asset companies were struggling to establish relationships with larger mainstream banks. Silvergate positioned itself as a conduit for these new ventures, which viewed other institutions with a mixture of skepticism and contempt. That was a pretty clever business move back then. But Silvergate went all-in on crypto and remained overexposed in the crash that began last year.
As Max Reyes of Bloomberg writes:
“Having hitched its wagon so tightly to the new world of crypto, the bank had exposed itself to old-world banking risk: as the industry’s prospects deteriorated, Silvergate had little other business to lean on.”
The bank’s shares are down 98% since their November 2021 high. During the same period, the global crypto industry has lost two-thirds of its value, falling from a $3 trillion market cap 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 turned pariah when his crypto empire collapsed last year. This event sparked a string of bankruptcies and put the entire industry on alert.
If traditional financiers and regulators previously viewed crypto as some sort of nuisance, the collapse of FTX and the criminal indictments that followed made the market radioactive. The closer you were to FTX, the more trouble you could get into.
“There’s an old saying – ‘if you lay down with dogs, wake up with fleas’ – and that’s exactly what happened at Silvergate,” said John Reed Stark, an outspoken crypto critic and former head of the Office of Internet Enforcement SEC, versus the Wall Street Journal. He described Silvergate’s collapse as a “catastrophic event for the crypto industry.”
Certainly, Silvergate has not been accused of wrongdoing over 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 for nor against crypto. I’m just as skeptical of this as I am deeply skeptical (and intrigued) of just about anything involving large sums of money and fanaticism.
In the Silvergate fallout, bullish analysts predictably point out how overexposed the bank was to any single industry, how it had lousy risk management, etc. – all to avoid blaming crypto.
“Silvergate’s demise was not a crypto issue,” said Marcus Sotiriou, an analyst at digital asset broker GlobalBlock. “Silvergate’s collapse was due to … not having enough cash, resulting in a lack of capital through the bank run.”
And yes, 100% — Silvergate should have diversified rather than putting all of its eggs in the crypto basket, which is commonly understood to be a basket full of spikes and broken glass that’s prone to wild swings.
But also…there’s a reason the tight-knit network of crypto giants all flocked to Silvergate. Other, better run banks did not have the courage to do so.
I’ve heard the “don’t blame crypto” argument a thousand times. When FTX imploded, it wasn’t Crypto’s fault – it was a bad apple, an old-fashioned scam. And it was the same story almost a year ago when last spring’s Terra/Luna crash wiped out billions overnight – don’t blame crypto; These were toxic algorithmic stablecoins that cannot be trusted. And likewise, when Celsius, Voyager, and Three Arrows all collapsed in the “crypto winter” of 2022 — it’s not our fault that the regulatory framework leads ruthless players to fool well-meaning investors…
There is a grain of truth in all of these stories, but as the crypto dominoes keep falling, the passage line becomes harder to ignore.
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