Silvergate, one of the most important banks in crypto, is in big trouble and if it crashes, off the back of FTX’s failures, it could be detrimental for crypto.

Essentially, federal prosecutors are now examining Silvergate’s role in banking Sam Bankman-Fried’s fallen FTX empire. The more pressing problem is that the collapse of FTX made crypto seem unattractive to other Silvergate customers, resulting in an $8.1 billion run on the bank. In response, Coinbase, Galaxy Digital, Crypto.com, Circle, and Paxos have said they will stop using Silvergate — as did other, less notable clients. Tether, the controversial stablecoin that has had its own problems with banking, helpfully popped up to remind us it was not using Silvergate. 

Where traditional banking comes in is that, as a result of this mess, very few banks will touch crypto because it’s so risky — and most traditional banks don’t let crypto clients transact in dollars 24/7. Access to banking that moves at the pace crypto does is rare, and only one other US bank can do it. 

“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. The issue is how easy it is to get into actual cash dollars, which in finance-speak is called liquidity. Less liquidity makes transactions more difficult. Already there is a broader gap between the price at which a trade is expected to go through at and the actual price at which it executes, Wu said.

Ironically, Silvergate has acted like a pass-through point for crypto with its Stablecoins that are backed by dollars and theoretically have cash or cash-like assets sitting in reserve somewhere. (The reason Tether is controversial is that there are questions about the existence and value of that reserve.) Silvergate’s job was to create a token when someone put a dollar into, say, USDC and to burn a token when someone took a dollar out. “We are this critical piece of infrastructure where folks, as they’re exiting the ecosystem and wanting to go to cash — those dollars pass through Silvergate,” Lane said in 2022.

All in all, the crypto industry desperately needs banks. But both of Silvergate’s competitors, Metropolitan and Signature, were pulling away from the sector even before this debacle. Metropolitan said in January that it was getting all the way out of crypto. And in December, Signature said it was going to get rid of $8 billion to $10 billion in digital asset-related funds. 

Moving forward, it has just gotten a lot harder to exchange dollars and crypto. Silvergate dealt in liquidity, and a liquidity problem can become a solvency problem real fast. The entire crypto industry just got a lot more fragile. 

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