It’s Only When The Tide Goes Out…
My article over the collapse of FTX started with the line “This Is Just the Beginning”, speculating on the fact that 1000% there was going to be a domino effect in the market following up Alameda’s and FTX’s collapse. At that point it was, and to some degree it still is, very unclear whether those effects will cause any further shutdowns.
After Genesis & Digital Currency Group, involved in yet another crypto scheme, this time the domino fell onto Silvergate, the world’s largest crypto bank. Their network was used by large investors, companies and stable coin issuers to move billions in and out the market 24/7. The absence of this ability seems to have profoundly affected crypto market liquidity and the insolvency of Silvergate increases the risks that regulator will accelerate their crackdown on crypto.
So, without further ado, why did Silvergate crash?
Also, Alameda Research and FTX had both an account at Silvergate, again confirming the fact that: it’s only when the tide goes out that you learn who has been swimming naked.
Silvergate’s First Steps in Crypto 
Silvergate Bank is a financial institution headquartered in California that has gained significant attention in recent years for its focus on serving the cryptocurrency industry. The bank was founded in 1988, but it wasn’t until more than 20 years later that it would become a significant player in the crypto space.
For its first three decades of operation, Silvergate was a small bank with only a few hundred million dollars in deposits. However, it managed to weather the storm of the 2008-2009 financial crisis thanks to the foresight of its early executives. In 2009, Alan Lane became CEO of Silvergate. With over 40 years of experience in the corporate banking sector, Lane was well-equipped to lead the bank in a new direction.
It was Lane’s decision to focus on cryptocurrency that would ultimately lead to Silvergate’s significant growth and success. In 2013, Lane invested in Bitcoin and began exploring the potential for Silvergate to provide banking services to crypto companies. That same year, Silvergate began onboarding crypto clients, eventually totaling 250, with deposits totaling $2 billion.
The Silvergate Exchange Network (SEN)
However, the real turning point for Silvergate came in the form of an idea to develop its own exchange network. The Silvergate Exchange Network (SEN) launched in early 2018 and allowed for the seamless transacting of fiat and crypto 24/7. This was a crucial development for the crypto market, which operates around the clock, and it attracted an additional 250 crypto companies to the bank. Among the companies using the SEN were major players such as Coinbase, Circle, ErisX, Bitstamp, Paxos, Genesis, Gemini, Binance.US, and Kraken.
In 2019, Silvergate began the process of going public with an initial public offering (IPO). Despite the bear market in crypto at the time, the bank continued to experience exponential growth. By 2020, Silvergate had nearly 1,000 clients and hundreds more on the waiting list. The bank had become a major player in the institutional money of the crypto industry, accounting for a significant portion of its market cap and trading volume.
In 2021, Silvergate’s success reached new heights. The bank’s stock price skyrocketed, reaching a 16x increase compared to its IPO price. Deposits peaked at over $14 billion, and the SEN network saw nearly $1 trillion in transfers.
The Turning Point in 2022 
The bank had seemed to be doing well at the start of the year, announcing that it had acquired Diem, Facebook’s failed cryptocurrency project. The plan was to create a stablecoin on the SEN to be used for payments.
However, as the crypto market began to crash, questions were raised about Silvergate’s solvency. This was partly due to the fact that the bank was offering loans backed by BTC-baked stablecoins. But there was also a more serious problem: both Alameda and FTX, two major players in the cryptocurrency market, had accounts with Silvergate. Rumors began to circulate that FTX had been using Alameda’s account to move customer money around, and that Silvergate may have been aware of this shortly before the two companies went bankrupt.
Despite these rumors, Silvergate issued a statement saying that its network would continue without issue after Alameda and FTX. It noted that FTX deposits accounted for less than 10% of all deposits at the bank. However, in December 2022, the SEC began investigating Silvergate’s solvency. This led to even more concerns about the bank’s future.
The Bank Run
In January 2023, Silvergate announced that it had experienced a bank run totaling $ 8 billion withdrawals. This wiped out all the profits that the bank had made since 2013. It was a devastating blow for the institution. Notably, Blackrock and State Street had both taken positions in Silvergate in December 2022, indicating that the bank was still seen as a significant player in the financial world.
Despite these investments, however, Silvergate became the second-most shorted stock in history, behind only Washington Mutual during the 2008-2009 financial crisis. The bank’s troubles were mounting rapidly, and it seemed that its future was uncertain at best.
In the end, Silvergate was forced to shut down the SEN network as clients moved their business to other banks.
Silvergate was finished the moment it shut down the SEN, the center piece of infrastructure. Most of Silvergate’s top clients have abandoned ship. In practice, this creates two more problems. Silvergate was the only bank with a 24/7 network available o clients. Moreover, there are only two other crypto banks, Signature and the Metropolitan Bank. The Metropolitan Bank announced in January 2023 that it would close their crypto branch. Signature is now the only viable option for crypto clients. In December 2023, Signature announced that it would cut its crypto banking services by half. Signature limited USDC transactions to Binance. Now to Kraken. Signature received 10 billion dollars from the Federal Loan Bank, much higher that what Silvergate had landed.
When I was doing research for this article, I wrote down in my notes: “After Silvergate, Signature will be the next crypto bank to be scrutinized by the SEC.”. This was on March 9, 2023. Fast forward to March 13, 2023, Signatures gets shut down by the SEC 😳 I will leave the article below for those of you interested.
Article ➡️ Signature Shut Down By State Regulators
What’s Next?
It is pretty simple: the industry is in need of an alternative route to keep the market active now, let alone at scale. Currently, only one cryptocurrency company appears to have taken on this challenge: BCB Group, which is based in the UK. BCB Group hopes to have its network up and running by the second quarter of 2023. If someone like JP Morgan acquires Silvergate Exchange Network, they may decide to reverse it depending on the level of regulatory scrutiny that banks are under.
My Final Thoughts
In my article on Ethereum Account Abstraction Upgrade, I referred to this period of chaos as “growing pain”. Growth inevitably means propelling yourself outside your comfort zone. If it weren’t scary, or uncomfortable, you are not growing. That means you are dwelling where you are and experiencing some kind of inflationary growth which is a mechanical type growth further projecting where you are right now in the future.
There is an interesting experiment supporting this thesis called: “The Resonance Effect”. I will digress a bit, but trust the process, there is a lesson here.
The Resonance Effect
Imagine a thin metal plate on top of which you spread fine grains of sands. Now you attach this place to a machine that is able to make the plate vibrate (resonate) at a specific frequency. What you will see is that the sand grains will be pushed around until they settle into a very distinct shape, depending on the frequency you enforce on the plate. For example, below you can see the plate shape at 345 Hz. We will call this share: “Where We Are Now”.
If you increase the frequency, say to 1033 Hz (growth), you will get this shape below. This represents “Where We Wanna Go”.
What I find interesting is that the transition between 345 Hz “Where We Are Now” and 1033 Hz “Where We Wanna Go” look like this 👇🏼
And that is exactly what “growing pain” look like: complete chaos. Why? Because of those little grains of sand need to leave the position they were initially at (comfort zone) and move to a new one (desired outcome or new state). That big move, at scale, is experienced as chaos. The growing pain.
Why Is This Important For Crypto?
The instabilities in the financial markets we are seeing right now are just those little grains of sand moving around towards a new state of harmony. What is the new state going to look like? That no one knows. I have my preferred scenario. Like anyone of us. But one thing is clear: blockchain will play a huge role in it. Whether on the background, as the new infrastructure layer on top of which all technology will run. Or on the foreground, in a truly decentralized world. The answer will probably be somewhere in the middle (also see the latest Ethereum Update on this topic), with a new era of technology that enables users to be true owners of their assets.
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These are unqualified opinions, and this newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor, and do your own research.
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