Crypto gets another hit with the Silvergate fiasco

Before this move, Silvergate had been a major crypto-friendly bank.

Crypto gets another hit with the Silvergate fiasco
A Bitcoin and Dollar notes are seen in this illustration picture taken September 27, 2017. REUTERS/Dado Ruvic/File Photo

Last Friday, Silvergate Capital Corp (a digital-asset-focused bank) made what it called a "risk-based decision" to end its Silvergate Exchange Network, which is (was) its crypto payments network. The announcement that it would be discontinued came two days after Silvergate raised questions about whether it was viable. Silvergate also delayed its 10-K filing (a shareholder's report) last Thursday.

"Effective immediately Silvergate Bank has made a risk-based decision to discontinue the Silvergate Exchange Network (SEN). All other deposit-related services remain operational," Silvergate said in a statement.

Before this move, Silvergate had been a major crypto-friendly bank. It accepted deposits from crypto exchanges and traders and built its own network for crypto settlement. That second part means it built an exchange service for the dollar side of the crypto transaction if both parties had Silvergate accounts. These deals happened instantaneously, as opposed to the waiting periods other banks usually put on money exchanges between different parties.

According to Silvergate: "We designed the SEN as a network of digital currency exchanges and digital currency investors that enables the efficient movement of US dollars between SEN participants 24 hours a day, 7 days a week, 365 days a year. ... The core function of the SEN is to allow participants to make transfers of US dollars from their SEN account at the Bank to the Bank account of another SEN participant with which a counterparty relationship has been established, and to view funds transfers received from their SEN counterparties."

But Silvergate was taking a risk by lending against crypto. And that was, well, risky. The trusted investor service Moody's brought Silvergate's bank deposit rating down from Ba3 to Caa1, which is bad. Right after that, Silvergate announced it would be shutting down SEN. On the same day, Bitcoin (BTC) and ether (ETH) started trading lower as customers left Silvergate.

"If Silvergate goes out of business, it's going to push funds and market makers further offshore," Ava Labs president John Wu told Barron's. Without a crypto-friendly bank, there's less liquidity. And with less liquidity, exchanges are harder, meaning fewer exchanges. So, crypto isn't looking too hot right now.