Last November, the empire of young entrepreneur Sam Bankman-Fred, an empire founded on FTX, the second largest cryptocurrency exchange in the world, collapsed, which declared bankruptcy and lost billions of dollars in a few days.
(1) At that time, the world of crypto (crypto) collapsed further, completing the events of a difficult year for the industry, and for many traders to lose their confidence in encrypted currencies completely.
And now the consequences of the collapse of the FTX platform and the huge losses incurred by the market continue, this time with the collapse of Silvergate Bank, which is the oldest and second largest bank serving the cryptocurrency industry.
Last Wednesday, corresponding to March 8, the holding company, Silvergate Capital, announced the liquidation of its bank, Silvergate, and the termination of its operations. Voluntary is the best path forward.”
What the company means by "industry update", of course, is the collapse of the FTX empire, and the resulting losses.
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Sam Bankman-Fred owned the companies "FTX" and Alameda Research, and he was one of the most important and largest clients of "Silvergate" Bank since the beginning of the founding of his companies, and at the beginning of last February, the US Department of Justice opened an investigation into the role of "Silvergate" Bank in what happened in the exchange of money between The two companies, a process that was the basis for the collapse of the Sam Bankman-Fred empire.
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Sam Bankman-Fred (French)
Once the Bankman empire collapsed, it became clear that Silvergate was suffering badly.
In January, the bank decided to lay off 40% of its workforce, and before that, in the fourth quarter of last year, it announced a net loss of nearly one billion dollars, after the bank’s customers feared the events of the “FTX” platform, and they rushed to withdraw their money, estimated at 8.1 billion. Dollars, so that bank deposits decreased by 68% and amounted to $3.8 billion in just 3 months, in a clear example of bank panic.
In order to cover the sudden withdrawals, the bank was forced to sell its assets, including treasury bonds at a value of $5.2 billion. Thus, it incurred huge losses with a sharp decline in its capital.
The bank also tended to borrow an additional $ 4.3 billion from the Federal Bank for mortgage lending, which raised concerns among some lawmakers in America about the entry of cryptocurrency market risks into the traditional banking system.
Perhaps what we are witnessing now is evidence of what could happen if banks overrelied on a very volatile and risky sector such as the cryptocurrency sector.
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Silvergate journey.. from real estate financing to cryptocurrencies
We can understand the impact of the Silvergate crisis on the entire cryptocurrency industry, mainly because there are not many banks offering the services it does.
(Shutterstock)
Silvergate Bank did not start in the cryptocurrency sector, but it did start as a bank specializing in real estate finance.
In January 2014, the bank entered the world of Bitcoin, and it was a year of the usual volatile years in cryptocurrency prices, so most of the companies that appeared at the time to provide services to this emerging sector were struggling to find fixed bank accounts that you could use to transfer Cryptocurrency to dollars.
And here Silvergate had a great opportunity in this sector at a time when most other banks were not even willing to approach it, and they were even closing the accounts of individual customers if they were found to be moving money to or from cryptocurrency exchanges.
Silvergate Bank saw this situation as an opportunity that could be exploited, becoming for many cryptocurrency firms one of the few - if not the only - sources of easy entry and exit of dollars.
Buying and selling cryptocurrencies in dollars is usually an inconvenience to those who trade in those currencies, especially companies or platforms specialized in trading and transferring cryptocurrencies, such as Coinbase and FTX.
While trading these cryptocurrencies is a global activity that takes place around the clock, seven days a week, buying and selling in dollar currency requires the use of the traditional financial system, which is slow, because it adheres to the official working hours of banks, and is also subject to supervision, regulation, and various laws.
One solution is to deposit dollars into a cryptocurrency exchange, which you can put your trust in, and use them to buy and sell cryptocurrencies in dollars.
But the risk comes from the possibility that your money may be lost or stolen and disposed of as you wish, as happened in the case of Sam Bankman-Fred.
Another solution to this problem is to use stablecoins, which are supposed to always be worth $1, to buy and sell cryptocurrencies instead of using the regular dollar coin.
However, this also requires trusting the stablecoin issuer itself.
But the common factor between the two things is that facilitating this type of transaction requires the presence of a bank that is friendly to cryptocurrencies, and for many exchanges and trading platforms for these currencies in America, this bank was the “Silvergate” bank, which provided its payment network (Silvergate Exchange Network) to facilitate the transfer of Cryptocurrencies to and from the dollar, allowing for easy transactions between bank accounts 24/7.
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In light of this, we can understand the impact of the "Silvergate" crisis on the entire cryptocurrency industry, because basically there are not many banks that provide these services. In America, for example, there is another bank that provides these same services, which is "Signature Bank", and in December The first announced that it will only reduce its cryptocurrency-related deposits by about $8-10 billion, which indicates that it is moving further away from the cryptocurrency industry.
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Technology banking crisis
Silicon Valley Financial Group (SVB Financial Group) is the largest bank to collapse since the 2008 global financial crisis, a sudden collapse that began to cast a shadow over global markets, especially on bank stock markets.
(Shutterstock)
The technology industry is in an unenviable position now. Almost two days after announcing the liquidation of Silvergate Bank, last Friday, corresponding to March 10, witnessed the collapse of another bank focused on lending to emerging technology companies in Silicon Valley, the stronghold of American technology companies, which is Silicon Valley Financial Group (SVB Financial Group), which is considered the largest bank to collapse since the global financial crisis in 2008, a sudden collapse that began to cast a shadow on global markets, especially on bank stock markets, as US banks lost more than $ 100 billion of their value. In the stock market, bank shares in Europe fell sharply, losing about $50 billion.
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SVB was ranked 16th in the US at the end of last year, with assets of about $209 billion.
There are several reasons for the collapse of the tech-focused bank, but the obvious reason is the US Federal Reserve's aggressive rate hikes since last year, which have destroyed the business environment for the start-ups that the bank mainly serves.
SVB Bank faced the same crisis that Silvergate Bank faced, which is the banking panic, as the bank's previous clients, whether they are cryptocurrency exchanges or technology startups, face huge financial challenges and crises these days.
That is why they tended to withdraw their money quickly from the banks, and with the increase in the interest rate, the bank's assets became in danger, because they are sold at less than their value, and that is why the bank loses its money.
Just as Silvergate reported a loss of $1 billion on asset sales in the fourth quarter of last year, SVB, which has a larger balance sheet, lost about $1.8 billion while liquidating its assets.
In both cases, US Treasury bonds accounted for a large portion of the losing liquidations.
But despite the panic on Wall Street, analysts stated that the collapse of the "SVB" bank would not likely trigger the domino effect that swept the banking industry during the global financial crisis in 2008, because "the banking system has better liquidity and capital than ever." Previously, the banks that are now suffering are far too small to pose a real threat to the entire system,” according to Moody’s.
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But the collapse of technology-supporting banks, such as Silvergate Bank and SVB Bank, may cause larger crises in the technology industry, such as the continued faltering of startups financially, more layoffs that have been going on for a while in the technology sector, and a larger collapse in the cryptocurrency sector, and other crises.
It seems that we will witness a possible crisis coming soon for the entire technology industry, because funding has begun to decline from the ground up due to the economic crisis and the raising of interest rates, and now with the collapse of those banks, technology companies will find no other solutions but to reduce their spending more, or to end their business completely!
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Sources:
1) Sam Bankman and FTX... How do you lose $16 billion in just one week?
2) Silvergate Capital Corporation Announces Intent to Wind Down Operations and Voluntarily Liquidate Silvergate Bank
3) Silvergate Faces US Fraud Probe Over FTX and Alameda Dealings
4) Crypto-focused bank Silvergate is shutting operations and liquidating after market meltdown
5) Silvergate Had a Crypto Bank Run
6) Signature Bank to Reduce Crypto-Tied Deposits by as much as $10 Billion
7) SVB is the largest bank failure since the 2008 financial crisis
8) How does a bank collapse in 48 hours?
A timeline of the SVB fall