Crypto's bedrock bank implodes
The implosion of Silvergate Bank is an existential event for what remains of the crypto ecosystem. Silvergate underpinned almost every American crypto company; without it, it's hard to see how the industry can possibly thrive.
If Silvergate didn't exist, it would have been impossible to invent it — regulators would not have allowed the creation of a de novo crypto bank in the past, and they certainly don't seem minded to do so in the future.
The big picture: Substantially all of crypto is based on a fundamental assumption that various coins, including bitcoin, are worth money. Which is to say, they can be traded, in meaningfully large quantities, for real dollars.
- In order for that to happen, crypto companies like Coinbase need a place they can hold dollars. For most U.S. crypto companies, that place was Silvergate Bank, both because it was very friendly to the industry and because very few other banks wanted to bank such operations.
Where it stands: Now that Silvergate has announced it is entering voluntary liquidation, there is no other U.S. institution that can realistically take its place. Silvergate's only real competitor in the space, Signature Bank, has already announced that it is deliberately — and rapidly — reducing its crypto-related deposits, rather than seeking to increase them.
- Bank regulators have repeatedly made it clear that they don't trust crypto and aren't likely to smile on banks that embrace the industry. That's one reason no larger savior has stepped in to rescue Silvergate, or at least take over its formerly valuable banking relationships.
- Even Silvergate only really managed to achieve its position as a regulated crypto bank through historical accident. It was founded in 1988, long before any cryptocurrencies were invented, and its crypto business, which started in 2013, grew organically in a way that was hard for regulators to stymie.
Reality check: Many crypto companies, including the largest crypto firms in the world, have found it almost impossible to meaningfully incorporate in the U.S. at all.
- Basing themselves in friendlier foreign jurisdictions, however, doesn't mean they're beyond the reach of U.S. regulators.
- The dollar is internationally ubiquitous, and everywhere there are dollars, U.S. financial regulators aren't far behind.
Between the lines: Crypto true believers tend to mistrust regulators and the dollar. But that in turn only reinforces the tendency of regulators to want to get involved.
What they're saying: "In the absence of regulatory compliance, customers don't have the information they need to assess and mitigate their risks," said Federal Reserve vice chair for supervision Michael Barr on Thursday.
- "Investors do not have the structural protections they have relied on for many decades. As a result, many have been victims of classic cases of fraud and abuse."
The bottom line: Crypto will remain little more than a wild-west financial outpost in the absence of a steady and reliable connection to the U.S. financial system. Silvergate was that connection. Now it's gone.