Tag: Crypto

From Boom to Bust: The Story of Silvergate Bank’s Dramatic Collapse

Silvergate Bank’s Collapse: What Happened and What Does It Mean for Crypto Banking?

Silvergate Bank was one of the leading banks for cryptocurrency businesses, offering services such as deposit accounts, wire transfers, and crypto-backed loans. The bank had over 1,100 crypto clients and over $10 billion in deposits as of December 2022. It was also one of the few banks that supported the Silvergate Exchange Network (SEN), a platform that enabled fast and secure transactions between crypto exchanges and institutional investors.


However, in March 2023, Silvergate Bank collapsed after a major crypto exchange, FTX, went bankrupt due to a cyberattack. FTX was a prominent customer of Silvergate Bank and owed it more than $2 billion in loans. The exchange’s failure triggered a massive bank run on Silvergate Bank, as many customers feared losing their money. Silvergate Bank could not meet the demand for cash and had to sell its assets at a loss and borrow billions from a federal agency. The bank’s failure seriously affected the crypto industry and the financial system, disrupting many transactions and operations.


In this post, we will explore what caused Silvergate Bank’s collapse and its implications for the future of crypto banking.

How FTX’s Bankruptcy Triggered a Bank Run on Silvergate Bank

FTX was one of the world’s largest and most popular cryptocurrency exchanges, with over 10 million users and over $100 billion in monthly trading volume. The exchange offered various products and services, such as spot trading, futures contracts, options, leveraged tokens, prediction markets, and decentralized finance (DeFi) platforms.
FTX was also a major customer of Silvergate Bank, as it used its services to facilitate its transactions and operations. Silvergate Bank’s financial reports show that FTX accounted for about 20% of its total deposits and loans as of September 2022. FTX also relied on Silvergate Bank’s SEN platform to enable fast and secure transfers between its accounts and other crypto clients.


However, on November 11th, 2022, FTX announced that it had filed for bankruptcy in the US due to a series of cyberattacks that resulted in the loss of “substantial” assets. The exchange said it had been hacked by unknown attackers who exploited a vulnerability in its system and transferred hundreds of millions of dollars worth of cryptocurrencies to external wallets. FTX also said it had been unable to access some of its funds due to frozen bank accounts and legal disputes.


The news of FTX’s bankruptcy shocked the crypto industry and caused panic among its users and creditors. Many people tried to withdraw their funds from FTX’s platform or claim their share of the remaining assets. However, FTX claimed it had limited liquidity and could not process all the requests. It also said it was working with regulators and lawyers to find a way to return money to its customers.


The bankruptcy of FTX also directly impacted Silvergate Bank, as it meant that the bank could not recover its loans from FTX or receive any deposits from FTX’s customers. Moreover, many other crypto clients who used Silvergate Bank’s services became worried about their money and started withdrawing their funds from the bank. This created a massive bank run on Silvergate Bank, which faced an unprecedented surge in cash outflows.

How Silvergate Bank Failed to Recover from the Bank Run

Silvergate Bank tried to cope with the bank run by borrowing money from other sources and reassuring its customers that it was still solvent and operational. However, these efforts proved insufficient and ineffective, as the bank continued to lose money and trust.


One of the sources that Silvergate Bank relied on was the Federal Home Loan Bank (FHLB) system, a network of regional banks that provide liquidity to member institutions. Silvergate Bank borrowed $4.3 billion from FHLB in Q4 2022, more than its total assets at that time. However, this also increased its debt burden and interest expenses, which eroded its profitability and capital.


Another source of funds that Silvergate Bank used was its own capital raise, which it announced in December 2022. The bank planned to raise $500 million through a private placement of common stock at $10 per share. However, this offer was met with low demand and skepticism, as many investors doubted the bank’s viability and valuation. The capital raise was eventually canceled due to a lack of interest.


Silvergate Bank also tried to reassure its customers and regulators that it could still operate and meet its obligations. The bank issued several statements claiming it had enough liquidity and capital to withstand the crisis. It also said that it was working closely with federal agencies such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC)  to ensure compliance and stability.


However, these reassurances did not stop the bank run or restore confidence in Silvergate Bank. Many customers continued to withdraw their funds or switch to other crypto-friendly banks such as Signature Bank or Anchorage Digital Bank. Many regulators also increased scrutiny and pressure on Silvergate Bank, questioning its risk management practices and financial health.


As a result, Silvergate Bank faced a severe liquidity crisis that forced it to announce its voluntary liquidation on March 8th, 2023. The bank said that it had decided to cease operations as the “best path forward” given its deteriorating situation. The bank also said that it would work with FDIC and other authorities to distribute its remaining assets among its creditors and depositors.

What Silvergate Bank’s Collapse Means for the Crypto Industry

Silvergate Bank’s collapse has significant implications for the crypto industry, affecting many stakeholders and aspects of the sector. Some of the major impacts are:

  • Loss of a major crypto-friendly bank: Silvergate Bank was one of the few banks that offered banking services to crypto businesses and investors, such as deposit accounts, wire transfers, loans, custody and settlement. It also operated the Silvergate Exchange Network (SEN), a platform that enabled real-time transfers of U.S. dollars between its customers and crypto exchanges. With Silvergate Bank’s exit, many crypto customers will have to find alternative banking partners or face disruptions in their operations and transactions.
  • Regulatory uncertainty and scrutiny: Silvergate Bank’s collapse raises questions about regulating and supervising crypto-related banking activities. The bank was regulated by both state and federal authorities, such as the California Department of Financial Protection and Innovation (DFPI), the Federal Reserve and the FDIC. However, it is unclear how these agencies coordinated their oversight and enforcement actions on Silvergate Bank, especially after it faced liquidity problems due to FTX’s collapse. Moreover, Silvergate Bank’s failure could prompt regulators to impose stricter rules and requirements on other banks that deal with crypto assets or customers.
  • Reputation damage and trust erosion: Silvergate Bank’s collapse also damages the reputation and trust of the crypto industry among investors, customers and regulators. The bank was seen as a pioneer and leader in providing banking solutions to the crypto sector, with a strong growth and innovation track record. Its failure casts doubt on the viability and sustainability of other crypto-focused banks or financial institutions. It also exposes crypto businesses’ risks and challenges regarding liquidity management, market volatility, cyberattacks and fraud.

Conclusion

Silvergate Bank’s collapse is a significant blow to the crypto industry, as it affects many aspects and stakeholders of the sector. The bank’s failure shows the fragility and vulnerability of crypto-related banking activities and the need for better regulation and supervision. It also highlights the importance of trust and reputation in crypto, which can be easily lost or damaged by external shocks or internal mismanagement. Silvergate Bank’s exit leaves a gap in the market that will be hard to fill by other players and poses a challenge for the future development and growth of the crypto industry.

Some links for extra reading:

https://www.msn.com/en-us/money/other/bitcoin-tumbles-as-silvergate-bank-s-collapse-highlights-the-biggest-threat-to-u-s-crypto-industry/ar-AA18qpiR

https://www.msn.com/en-us/money/markets/how-silvergate-s-crypto-collapse-differed-from-silicon-valley-bank-s-no-bailout/ar-AA18tNo8

https://www.lajollalight.com/business-news/story/2023-03-08/la-jollas-silvergate-bank-to-close-because-of-crypto-losses

https://coinmarketcap.com/alexandria/article/why-silvergate-bank-is-winding-down…-and-why-it’s-a-big-blow-to-crypto

https://www.msn.com/en-us/money/markets/san-diegos-silvergate-bank-to-close-because-of-crypto-losses/ar-AA18nQGW

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A BASIC INTRODUCTION TO THE WORLD OF NFT

If there is any huge trend, growth, and wide acceptance ever recorded in any digital asset within the shortest time, that would be NFT!

NFTs seem to be everywhere!

Though the first NFT was created back in 2014, which was a short video clip of artwork. The video was created by Jennifer McCoy, and the video was turned into NFT by her husband, Kevin McCoy and Anil Dash. It was later sold for $1.47m in June 2021.

The buying frenzy of digital assets has since increased and has been on the rage!

WHAT IS NFT

NFT means non-fungible tokens. NFTs are simply digital artwork and assets; they are cryptographic tokens that exist on the blockchain. Each unit of NFTs has its unique data and represents a unique asset that cannot be interchanged or duplicated. An NFT can be a complete digital asset such as an audio or game file, an image, a gif, and digital art or can be token versions of real-world assets like real estate, house, land, and jewelry.

The primary use cases of the new digital assets are proof of authenticity and ownership.

VALUE OF NFTs

Whatever thing has value is only valuable because people believe it is valuable. The value of non-fungible tokens stemmed from their uniqueness, scarcity, and the general value ascribed to them. The value of NFTs, like other valuable items, is assigned by people, which is not inherent to the thing. The price of an NFT art is set by the owner selling it. However, the price changes in response to the demand and supply of the market.

Owning a digital collection of art is cool as the idea of ​​owning an original work is attractive and a sign of social status. This practically defines Veblen goods. In addition, NFTs are also purchased to resell when the value increases and can be sold for more money, just like physical art. Non-fungible tokens allow collectors to take advantage of all the perks of owning a physical work of art. But with an added benefit: their collection can be shared freely over the Internet without limitations. They can therefore accumulate more value as they grow.

At first, it may seem that if the free circulation of the work is allowed online, which can be seen by anyone, screenshotted, or even downloaded, no one will want to have the original. However, if you think about it, much of our society is driven by status. If having a particular original work gives you status, many people will be willing to pay for it. There must be thousands and thousands of copies of mythical paintings by Picasso or Van Gogh. However, millionaires are still willing to spend millions of euros for the original. The value of an NFT increases based on its popularity which may equal its demand, limited unit, and value ascribed to it.

The previous CEO of Twitter, Jack Dorsey, sold his first tweet on Twitter as an NFT for $2.9 million in March last year. The tweet is only 5 words and was tweeted back in 2006! Mike Winklemann, a famous digital artist, sold one of his works as an NFT for $69.3m in 2021. An NFT named “the merge” was bought by 28,983 collectors for $91.8m.

NFTs can be viewed online by anyone, screenshotted, or maybe downloaded. Still, the owner only has the original item with built-in authentication.

The original use cases of NFTs are to help the artist and digital creators monetize their work by selling it and gaining royalties whenever the digital asset is resold. However, the use cases of the new digital assets have since grown and do not seem to be at their peak yet. The primary main use case of NFTs now is to authenticate. Digital creators and companies in different industries have adopted NFTs to ensure the authenticity of products that customers or consumers buy. For example, Nike uploads a digital version of the product a customer buys on the customer’s virtual locker named “Cryptokick,” solving its authentication problems. The new technology can also be adopted in the food and medical sector to track the producer, the ingredients used in making the product, and its journey from the manufacturer through the shipment process.

The unique tokens are also used in the entertainment industry as a receipt of payment, to purchase collectibles on an online store, and to show support by fans to their favorite artists and celebrities. For example, fans of a football team, music artists, public figures, etc., can support their favorite without being physically present at an event. Music concerts can also sell tickets and give fans a digital gift.

For example, the National Basketball Association (BNA) introduced the “NBA Top Shot.” It’s an online marketplace where fans can purchase different moments from their favorite player, match, or team.

The real estate industry has also adopted NFT. It is used to provide rental services, proof of real estate asset ownership, transfer land deeds, and keep track of changes in the property’s value.

Buyers of real estate properties can now know everything about the properties they want to buy, starting from when they were first built. Virtual real estate properties can also now be sold as non-fungible tokens.

NFT has also helped store medical records and verify the identity of people without compromise. An example of this use case is a non-fungible token birth certificate issued to newborns by healthcare providers.

Intellectual property and patent rights have never been safer. Artists, inventors, and digital creators can use NFT tokens to prove or protect the ownership of any innovation, invention, creation, or content.

The unique tokens are also a suitable way of representing academic credentials by academic institutions. For example, educational institutions can use NFT to prove the class of degree earned by students, their attendance, tuition payment records, and other important information. This is thanks to the unalterability of the base record on the blockchain.

The NFT technology has been adopted in the gaming, transportation, and finance industries and used to exercise voting rights, ticketing, and tracking artwork.

The estimate market capitalization of NFT is $12,152,088,770, the sales volume (24 hours) is $23,021,382 and the total sales (24 hours) is $26, 910 as at 05:35pm 04/06/2022 (source: https://coinmarketcap.com/nft/).

Celebrities, international companies, famous artists, footballers, social media companies, and sports associations have adopted the new technology. However, they are still embracing digital assets and the latest crypto technology. Some of them are Adidas, Samsung, Nike, Coca-cola, Dolce & Gabanna, MAC, Facebook, Instagram, Snoop Dog, Charles Hoskinson, and David Beckham.

NFT tokens are bought and sold online through different markets. The most famous places to buy and sell digital arts are Opensea.io, Rarible, Foundation, and Binance.

Despite the current many uses and applications of NFT, the potential of the new crypto technology may not even be at the optimum.

FINAL THOUGHTS

The popularity of NFTs is growing, and the use cases also keep increasing. However, some NFT applications may not be so practical or popular in the future. Nevertheless, given the issues of authenticity, ownership, and scarcity of art and collectibles that they are solving, the technology is here to stay.

Since the NFT industry is still new and just like every other investment, precaution needs to be overserved. However, investing small amounts in good digital asset collections to try out the potential may not be a bad idea.