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How the Silvergate failure will affect the crypto industry

BusinessCryptoHow the Silvergate failure will affect the crypto industry
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Industry heavyweight and crypto-friendly bank Silvergate announced on March 8 that it is ceasing operations and liquidating, as it believes it is “the best path forward.”

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it is The latest blow to the crypto industry, which has been battered by multiple collapses, bankruptcies and severe financial and confidence losses. It also underscores the wide-reaching and seemingly endless ramifications of the infamous FTX debacle, which some players are still grappling with.

Silvergate to start failing in Q4 2022

Following the FTX bankruptcy in November, Silvergate CEO Alan Lane sought to reassure customers and investors, issuing an update on Silvergate’s exposure to FTX.

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“As of September 30, 2022, Silvergate’s total deposits from all digital asset clients totaled $11.9 billion, of which FTX represented less than 10%,” Lane said in a statement. “Silvergate has neither any outstanding loans nor investments in FTX, and FTX is not a custodian for Silvergate’s bitcoin-collateralized SEN leveraged loans. To be clear, our relationship with FTX is limited to deposits. “

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The company reported a $1 billion loss for the fourth quarter, and in January it laid off 40% of its staff “in keeping with the economic realities facing the digital asset industry,” according to another filing.

In a Securities and Exchange Commission filing, Silvergate said its results could differ “materially” from those stated in previous statements, including that “after substantial volatility in the digital asset industry during the fourth quarter of 2022, the company’s digital asset-focused business viability”. And continuing into 2023, which has also included several high-profile bankruptcies, has disrupted investor confidence in cryptocurrencies and increasingly increased scrutiny of the digital asset industry.

Subsequently, several companies including Galaxy and Coinbase severed their ties with Silvergate.

“All client funds are safe, accessible and available on Coinbase,” Coinbase tweeted on March 2. Coinbase will facilitate institutional customer cash transactions with our other banking partners and has taken proactive actions to help ensure that customers are not impacted by this change.

Silvergate’s statement on March 8 said, “In light of recent industry and regulatory developments, Silvergate believes that an orderly winding up of bank operations and a voluntary liquidation of the bank is the best path forward.” The liquidation plan includes full repayment of all deposits. The company is also considering how to resolve claims and preserve the residual value of its assets, which include its proprietary technology and tax assets.

The bank, which had a relationship with FTX, has been running into a number of issues in recent weeks. The delay in its annual report led to a sharp decline in the company’s stock.

How does this affect the crypto industry

According to Sid Powell, CEO and co-founder of mapleThe impact of the Silvergate situation on the wider digital asset ecosystem is likely to be minimal as we are already in a period of low trading and volatility.

“In addition, the major US-based exchanges were already preparing for what eventually happened in Silvergate, and in turn are making arrangements with other banking partners such as Signature,” Powell said. An increasingly useful position to be in now.

“I expect other banks to step in and try to fill the void quickly,” Powell said. “That said, new banks moving into this area will have to proceed with caution due to regulatory pressure of late.”

Regulators are circling around Silvergate, adding to the problems for the bank, which cited investigations by banking regulators, congressional inquiries and a US Justice Department probe as reasons for the filing delay.

In December, Sen. Roger Marshall (R-Kan.), Sen. Elizabeth Warren (D-Mass.) and Sen. John Kennedy (R-La.) sent a letter to Silvergate asking whether the bank was aware that FTX Funds were being improperly deposited into the Silvergate account of a customer Almeida and whether the bank was prepared to withstand the current crypto market stress.

Then, in February, the senators issued a statement saying the bank’s response to its role in the loss of billions of dollars in FTX customer funds had been “largely evasive.”

On March 8, Warren tweeted: “As the bank of choice for crypto, the failure of Silvergate Bank is disappointing, but predictable. I warned about Silvergate’s activity being risky, if not illegal, — and Identified serious due diligence failures. Now, customers must be made whole and regulators must step up against crypto risk.”

“While it is unfortunate that Silvergate is ceasing operations, I think there is an important lesson about the sustainability of the industry,” said Christopher Alexander, chief communications officer. Liberty Blockchain, “One, clearly the rules currently work despite claims to the contrary, as depositors will get all their money back. Two, a negative event like this happens and the industry moves on to find new solutions.

more investigation required

Other industry experts are noting that the closure of Silvergate is going to be a major blow to crypto and has brought a lot of regulatory scrutiny on the industry.

“I think the main debate that is going to come out of this is whether crypto banking should be separated from standard banking,” said Jake Boyle, Director Caleb and Brown.

From Boyle’s point of view, there should be no separation; Crypto should be integrated into the existing financial system.

“I think that for banks serving the crypto industry, there will need to be a greater focus on risk management,” he said. “Ultimately, digital assets are incredibly volatile and in that sense the opposite of traditional assets.”

He believes that Signature will serve as the go-to bank for the digital asset industry.

“But, nevertheless, this situation will hold back on the development of our industry for some time,” Boyle said. “But we will recover and keep growing, and I’m optimistic about that.”

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This article originally appeared on GOBankingRates.com, How the Silvergate failure will affect the crypto industry

The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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