Last Updated on 2 weeks by Ameer Hamza
The world of finance has been buzzing with news of two major banks, Silvergate Bank and its holding company Silvergate Capital Corp, as well as Silicon Valley Bank and its holding company SVB Financial Group. These banks have made waves in the crypto industry, and their recent liquidations have sparked a lot of interest and concern. While the liquidation of Silvergate bank had its own unique impact, the liquidation of Silicon Valley Bank has garnered the most attention. This article explores the differences between the two liquidations and what they mean for the rapidly evolving crypto industry.
The Ripple Effect: What the Liquidation of Silvergate Bank and Silicon Valley Bank Means for Other Financial Institutions
Silvergate has been a significant player in the cryptocurrency ecosystem since 2016, serving as an on- and off-ramp for significant exchanges like the defunct FTX. Recently, the bank declared its intention to stop operations and voluntarily liquidate the Bank. You might be wondering what went wrong or what transpired to cause that outcome. Well, in the fourth quarter of last year, the FTX connection and a general decline in confidence in cryptocurrencies reduced the bank’s deposits by more than 50%, forcing it to sell its assets at a loss to satisfy redemptions; this is what one would call a classic bank-run scenario. Silvergate sold assets on its balance sheet as the deposit flight persisted, culminating in a $718 million loss—larger than the bank’s entire profits since 2013—and surpassing all of its previous gains. After multiple failed attempts to preserve the failing bank, it decided to call it quits on March 8. It is worth noting, however, that the bank went into voluntary liquidation, describing a winding down plan that promised a “full refund of all depositors.”
On the other hand, when Silicon Valley Bank was compelled into Federal Deposit Insurance Corporation (FDIC) receivership on March 10, the bank’s liquidation shocked customers, investors, and regulators alike. Contrary to Silvergate, SVB had $209 billion in assets at the end of 2022, making it the 16th-largest bank in the US. Its failure rivals only Washington Mutual’s demise during the 2008 financial crisis in terms of failure. SVB went through a typical bank-run scenario also. Similar to Silvergate, it also sold balance sheet assets at a loss to offset the value of these withdrawals.
Where Do We Go From Here?
Many are unsure whether the crypto industry will move ever more offshore in the wake of the unexpected failure of these two key banks. Contrary to what the skeptics would have us think, the failure of Silvergate and SVB is not evidence of cryptocurrency’s vulnerability. It is crucial to note that this crisis was not caused by cryptocurrencies; rather, it was possibly caused by fractional reserve banking. Also, on the contrary, these occurrences enable everyone to observe the resilience of the crypto ecosystem. Nevertheless, these occurrences underscore the inherent vulnerability of the old banking system.
The liquidation of Silvergate Bank and Silicon Valley Bank brings to light some of the difficulties faced by conventional banking organizations in navigating the quickly changing cryptocurrency industry. However, there is no doubt that the industry of cryptocurrencies and the part that banks will play in it in the future will be shaped by the lessons learned from these occurrences.