Nearly four months after the bankruptcy of cryptocurrency exchange FTX and its sister company, Alameda Research, both founded by Sam Bankman-Fried, the crypto industry is in turmoil again.
The origin of this latest crisis is Silvergate Capital (SI). The San Diego bank is considered the crypto bank. It is one of the few banks in the U.S. that can facilitate real-time cash transfers among crypto firms.
The firm announced on March 1 that it needs time to review its books and adjust its 2022 earnings following negative events in January and February.
"A number of circumstances have occurred which will negatively impact the timing and the unaudited results previously reported in the earnings release, including the sale of additional investment securities beyond what was previously anticipated and disclosed in the earnings release primarily to repay in full the company’s outstanding advances from the Federal Home Loan Bank of San Francisco," the bank said in a regulatory filing.
Events Could Affect 'Ability as Going Concern'
It added that it sold additional debt securities in January and February and expects to record further losses related to the other-than-temporary impairment on the securities portfolio.
These additional losses will hurt the company's regulatory-capital ratios and "could result in the company and the bank being less than well-capitalized," Silvergate warned.
Most worryingly, Silvergate is suggesting its future may be at stake.
"The company is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements," the firm warned.
"The company is currently in the process of reevaluating its businesses and strategies in light of the business and regulatory challenges it currently faces."
These warnings sent Silvergate stock plummeting nearly 58% on Wall Street. Most crypto firms also immediately cut their ties with the bank.
Coinbase (COIN) Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy Digital and Gemini all said on March 2 that they would suspend automated clearing house, or ACH, transfers and other business operations with the bank. LedgerX, a crypto derivatives provider, was the first to cut ties with Silvergate.
Essentially, all these firms no longer accept payments through Silvergate and no longer use the bank to make payments.
The questions now are whether Silvergate will fall and the extent to which other crypto firms are exposed to the bank.
"Coinbase has de minimis corporate exposure to Silvergate," the crypto exchange platform indicated.
Big Investors Are Rushing Into Stablecoins
Some players like Coinbase wanted to reassure investors by minimizing their exposure to Silvergate -- without, however, disclosing figures.
One of the immediate consequences of this new crisis is that institutional investors such as hedge funds find themselves without a bank to go through for crypto-clearing transactions. They are thus turning to stablecoins, which are cryptocurrencies pegged to other assets, like the dollar, in an effort to limit their volatility.
Stablecoins are widely used by many institutional investors, who see them as a way to invest in the crypto industry while protecting themselves from sharp market moves. They can move large sums worldwide in one click, without having to go through traditional banks.
In theory, an investor in a stablecoin can exchange his tokens at any time for dollars or euros with trading platforms or directly with the issuer of the stablecoin. That's because these are supposed to have reserves of collateral made up of cash and cash-equivalents.
The valuation of the main stablecoins has also risen sharply in the past 24 hours.
The market capitalization of USDT, a stablecoin issued by Tether, has risen from just over $70 billion on March 1 to nearly $72 billion at the time of this writing according to data from CoinGecko.
The market value of USDC, a stablecoin issued by Circle, increased from $42.3 billion on March 1 to $43.2 billion at last check. Basically, the stablecoin has gained almost $1 billion in market capitalization in less than 48 hours.
A key issue and caveat: Stablecoins are in the crosshairs of the U.S. Securities and Exchange Commission because the regulator considers them securities.
This approach has serious consequences for the sector because it means that most firms currently offering the sale and purchase of stablecoins may be violating the law because they are not registered with the SEC.
The regulator has opened investigations into several crypto firms issuing stablecoins or offering stablecoin-related products.
Another problem with stablecoins is that observers have doubts about the assets supporting them or the reserves of the firms issuing them. If investors decide to withdraw their funds, will the firms be able to meet those demands?
