How one bank brought down crypto in America

Silvergate is a name you’ve probably not heard of. But its importance to the crypto industry cannot be overstated. This obscure California-based bank was the main way crypto exchanges allowed customers to exchange their tokens for real money. But now, it could be the nail in the coffin for crypto in America.?

Who or what is Silvergate??

It’s a bank that offered services to all major crypto exchanges, Binance, Coinbase, Gemini was among them - as were FTX and Alameda. More on those two later. At its height last year, it had $12 billion in deposits and more than 1,000 institutional investors.

The reason? It was regulated up to the hilt by the Federal Deposit Insurance Corp., the Federal Reserve, and the California Department of Financial Protection and Innovation.?

And, more importantly, it had developed a real-time payments system that allowed crypto exchanges and institutions to swap dollars or euros in real-time. This was unheard of in the traditional banking sector, most standard banks don't offer real-time payment capabilities. This was a proper bank that liked crypto, and the industry loved it.?

It also didn’t charge exchanges for using its services, instead, it used the deposits it received to invest in safe securities. Smart you might think. Then FTX rode into town and set fire to everything.?

Banking bin fire?

The exchange held more than $1 billion of FTX’s money. When things collapsed, customers started pulling out their deposits as fast as possible. That left Silvergate with a huge hole in its finances, and it had to sell its investments at a steep loss. We’re talking a $700 million steep loss.?

While Q3 last year was wildly profitable, by the end of Q4 it had reported losses of more than $1 billion. Into this year it seemed like it had steadied the ship, but this week, that steadiness was torpedoed by news it was delaying releasing financial reports as it needed more time to assess just how bad things had become for the beleaguered bank.?

Shares slid 33% on the news. This is a bank, people, not a shitcoin. But things were about to go from bad to, “tell my family I love them” shitsville.?

Traders began piling pressure on the bank by short-selling its stock. Fun fact: Silvergate is the most shorted-US stock right now. But rumours of misconduct from Silvergate started spreading, including allegations it had been money laundering for its clients.?

The US Justice Department’s fraud section is now investigating Silvergate over its dealings with FTX and Bankman-Fried’s cryptocurrency hedge fund Alameda Research. Senator Elizabeth Warren has said Silvergate’s management had been “evasive” in telling the public what it had been up to. Silvergate’s image as a squeaky clean bank is now in tatters, which lawmakers are using as justification for keeping crypto out of mainstream finance.?

No to crypto?

US regulators are a cautious bunch. After the contagion of the 2008 financial crisis, the Fed and friends have paid more attention to how interconnected industries are to each other.?

When crypto came along, its boom/bust cycles left the US economy largely unscathed. Regulators want to keep it that way. Earlier this year, a bunch of America’s biggest regulatory bigwigs issued a statement saying they are going to do their very best to stop crypto volatility worming its way into the balance sheets of financial institutions far from its shores.?

That makes Silvergate a litmus test for the Fed’s resolve. Based on the regulators’ joint statement and the problems that have arisen from the dumpster fire that is FTX, it’s likely all banks with ties to crypto are going to be under increased scrutiny. Analysts now believe there’s a serious push to get crypto completely cut off from the US banking system. Those sentiments were uttered again this week by the Federal Reserve.?

And in the last 24 hours, Kraken and Coinbase have announced they are no longer accepting payments to or from Silvergate.?

If true, crypto in America is entering an even icier chapter of the crypto winter. Without banks and off-ramps, crypto isn’t worth the digital paper it's printed on.

What people are shouting about: ???

• FTX exec pleads guilty - Nishad Singh, the former director of engineering at the now-dead exchange, pleaded guilty to one count of wire fraud, three counts of conspiracy to commit fraud, one count of conspiracy to commit money laundering, and one count of conspiracy to defraud the United States by violating campaign finance laws. He joins Caroline Ellison, the Tumblr-loving CEO of Alameda, and Gary Wang, who was FTX's chief technology officer, both pleaded guilty in December to seven and four criminal charges, respectively.
• Twitter sleuths are wondering if a wallet connected to Jane Street brought down Terra UST - Igor Igamberdiev, a researcher and online cyber sleuth has been following a breadcrumb trail through the collapse of the Terra stablecoin and found some interesting beginnings. Igamberdiev has a strong feeling the wallet that lit the touch paper is connected to Jane Street, the global trading firm that acted as a finishing school for FTX employees. Food for thought.
• Vitalik buys things with crypto - the co-founder of Ethereum has been blogging again and this time he's talking about things he's bought with crypto and what the experience has been. Riveting extracts include: that time he nearly bought a tea, a time when he did buy tea for himself and all his friends, and that time he had to leave a restaurant, walk to an internet cafe and use the wifi to pay for sushi.
• Yuga Labs launches NFT collection on Bitcoin - not one to be outdone, Yuga Labs, the Bored Ape creators, have joined the Bitcoin NFT craze. Or rather, the Bitcoin, scribble things in the notes of Satoshis which makes them unique craze. Yuga has launched a 300-piece limited edition of generative art pieces that it says, “will not have other utility or interact with or be related to any previous, ongoing, or future Ethereum-based Yuga projects.” So there's that.
• The fallout from Silvergate cost crypto $480 million - As exchanges raced to sever ties with Silvergate, crypto took a nose dive. Bitcoin's price dropped by more than $1,000 in 10 minutes, dragging the market cap of all tokens down with it. Total market cap slid from $1.068 to $1.02 trillion. For traders predicting prices were going up, they got margin called like there's no tomorrow. Bitcoin bros lost $76 million and $40 million went up in smoke for Eth traders.

The at first glance incredibly boring, but in reality, incredibly insightful and interesting thing you should read this week ??

Regulators are coming for the Metaverse . Margrethe Vestager, the?European Union?antitrust chief, warned that her team already has the Metaverse and AI in its crosshairs in a bid to head off potential competition abuses. The announcement is interesting because the metaverse has operated for the most part outside the glaring eyes of regulators. That, according to Vestager, is about to change.

Chart of the week ??

The Silvergate rout yesterday.

Strange but true ??

• Coinbase’s second largest revenue stream is the government? Yup, some keen-eyed Redditors noticed in the exchange's latest filings that the second biggest revenue stream was the interest Coinbase was earning from depositing money into US Treasuries.
• It continues to be a sad place in the Metaverse - A while back we reported on how the metaverse was a giant place with no one in it . We regret to inform you that it's still the case. The Sandbox and Decetraland, two multi-billion dollar companies have struggled to keep more than 1,000 users logging in each day between them.
• Gwyneth Paltrow is now a crypto investor - I was going to do a story about Snoop Dogg throwing what little pride he has left at a crypto casino , but I found a better celeb story! Paltrow, the former actress and now full-time snake oil salesperson, is now in the crypto biz, thanks to her fund Kinship Ventures. It will have $75 million to invest in early-stage consumer goods, and of course, web3 startups. We're saved!
• The CEO of Celsius wants you to know he's doing just fine - Alex Mashinsky, the CEO of the now-dead crypto lender Celsius, was spotted riding a private jet with some chums and a dog. In case you'd forgotten, this is the same Mashinksy that is currently being sued by New York's attorney general for defrauding investors out of billions of dollars .
• A german crypto investor tried to argue his winnings weren’t money - Yup, a crypto investor in Germany stood in front of a judge this week and tried to argue that the $3.6 million in crypto gains he made were not taxable. It was, says the defendant just data and records, and couldn't possibly be taxed. The judge, sadly disagreed.

That's it for this week! See you on the flippety-flop.

I love you all. ??