Before Silver Gate, After Silver Gate ── What is the role in the cryptocurrency industry | coindesk JAPAN | Coindesk Japan

Financial industry media American Banker reported in January that two crypto-friendly banks, Silvergate and Signature, have borrowed heavily from the Federal Home Loan Bank (FHLB). . FHLB is a government-supported institution that supports banks that handle housing loans.

For some insiders in the cryptocurrency industry, this was heartbreaking news. When Satoshi Nakamoto released the Bitcoin codebase in 2008, he remembered it as not only a technological breakthrough, but also a political statement.

Even before crypto assets were called “crypto assets,” Bitcoin was understood to follow certain rules. The rule is that there is no government bailout (that is, do not depend on the government).

Of course, not everyone was offended by the Federal Home Loan Bank’s financing of Silvergate, which plays a key role in bringing money to the crypto economy. After all, a bank is a bank.

bleak future

But as Silvergate may deserve, few people will be happy that it’s about to go bankrupt. Silvergate announced on March 2 that it will delay the filing of its annual report with the US Securities and Exchange Commission (SEC). He had recently sold assets to pay off a loan from the Federal Home Loan Bank.

The bank lost $1 billion in the fourth quarter of 2022 (October-December quarter), but that figure could be significantly revised. With loans still owed, Silvergate wrote that it could soon be in a situation where it “doesn’t have enough capital.”

Predicting when a company will fail is extremely difficult and is best left to professional investors. The prospects for Silvergate itself are bleak, but things could change.

But it is a bad omen that companies like cryptocurrency trading giant Coinbase are leaving Silvergate and partnering with rival Signature.

Cathie Wood of Ark, known for its active investment in the crypto asset field, sold 99% of Silvergate shares held by the company’s disruption-focused fund. . Most of Silvergate’s shares have been sold short, including a $1 million-plus position held by billionaire trader George Soros’ hedge fund.

Simultaneously with the tightening of regulations

The Silvergate problem coincided with a regulatory crackdown on crypto assets. Especially now, regulators are focused on minimizing the risk that problems in the crypto-economy will spill over into the traditional economy.

CoinDesk columnist and venture capitalist Nic Carter has likened the current situation to the Obama administration’s policy of pressuring banks to snub a legal but ethically dubious industry. .

In fact, just one day in January, four White House officials released a letter urging banks to avoid getting involved in cryptocurrencies. The US National Economic Council also issued similar guidance.

The US Federal Reserve Board (FRB) has rejected Custodia Bank’s application to join the US Federal Reserve, which plans to operate a cryptocurrency custody business. Separately, it released a document detailing the risks for banks handling crypto-related deposits, including stablecoin reserves.

I believe the crypto industry will survive even with increased regulation, and I believe that greater regulatory clarity will enhance the quality and quantity of relationships between crypto companies and banks. The crypto industry will never go away, and bankers I know still think it has an opportunity.

And these views have nothing to do with Silvergate. In particular, it has nothing to do with its formation or background. Is the Silvergate bankruptcy ultimately good for the industry?

Relationship with FTX

Silvergate first did business with crypto-related companies in 2014, when it was impossible for them to open bank accounts. FTX founder Sam Bankman-Fried described the situation as “the history of cryptocurrency companies can be divided into pre-Silvergate and post-Silvergate.”

Bankman-Fried’s remarks, which have since been removed from the Silvergate website, may offer a hint as to why the company is declining.

The U.S. Department of Justice has launched an investigation into whether Silvergate was involved in fraud by FTX and Alameda Research. The investigation is ongoing, but as pointed out by cryptocurrency media Protos, FTX instructed its customers to transfer money to Alameda accounts in Silvergate.

In an open letter to Silvergate in December, Senator Elizabeth Warren and others called the incident “a grave failure of banks to meet their responsibility to monitor and report suspicious financial activity of their customers.”

That may be true. But who decides what is right?

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Alan Lane, CEO of Silvergate (Silvergate)
｜Original: Before Silvergate and After Silvergate