Bank trouble could turn crypto into Monopoly money

Metropolitan Bank Holding

07/03/2023 15:32

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Anita Ramaswamy
       NEW YORK, March 7 (Reuters Breakingviews) - What happens
when the cryptocurrency network loses one of its largest
plumbers? It’s possible those coins will start to become
worthless. Silvergate Capital  SI.N , the go-to U.S. bank that
took deposits from cryptocurrency companies to facilitate quick
exchanges into and out of fiat currency, faces the prospect of
insolvency. That leaves few avenues for the firms that help
trades of bitcoin, ethereum, and other digital currencies to
house their cash. It’s the latest puncture for a market that has
swiftly lost steam. Losses of confidence in a currency – digital
or otherwise – are contagious.  
    The institution, which has humble roots as a regional real
estate mortgage lender, has decided to shut down its flagship
product, a payments network that helped investors move
cryptocurrencies from one exchange to another. Its network
attracted deposits from crypto companies, which as of January
made up 90% of Silvergate’s total assets, according to the Wall
Street Journal.
    But after a large customer, crypto exchange FTX, declared
bankruptcy last November, others rushed to pull their funds out
of the bank. Silvergate saw its crypto-related deposits plunge
68% in the fourth quarter last year to $3.8 billion, according
to its filings. Without those deposits, it doesn’t have a
reserve of cash to lubricate the system. It has since been
selling bonds to help offset the $1 billion loss it incurred.
And it now faces a criminal investigation by U.S. prosecutors
for its relationship with FTX, according to Reuters.
    Regulators may force the company to wind down operations,
meaning cryptocurrency firms that issue stablecoins backed by
U.S. dollar reserves won’t have a safe place to put their
cash. Coinbase Global  COIN.O  has already jumped ship to
partner with Silvergate’s competitor Signature Bank  SBNY.O ,
according to Reuters. But Signature Bank announced plans earlier
this year to pivot away from taking digital asset deposits,
suggesting it isn’t keen to stay in the business. So did
Silvergate’s other large competitor, Metropolitan Bank  MCB.N . 
    It's possible that these companies could move their funds
offshore, but the industry has already suffered a loss of
confidence so great that banks outside the United States may be
reticent to fill the gap Silvergate leaves. And without
traditional banks that back the system, cryptocurrencies cannot
be widely used to buy and sell real things. A viable bitcoin
market could potentially exist someday if it fully replaces
dollars – and yen and euro. But it’s looking more likely that
digital currencies will eventually be worth as much as Monopoly
money.  
    Follow @AnitaRamaswamy on Twitter
    

    CONTEXT NEWS
    Silvergate Capital suspended its crypto payments network,
the Silvergate Exchange Network, and expressed doubts over the
viability of its business on March 3. The company’s shares had
fallen to a record low the day earlier, ending down more than
97% from their all-time high in November 2021, Refinitiv data
shows. 
    The company reported a net loss of $1 billion in the fourth
quarter of 2022. Last week, crypto heavyweights including
Coinbase Global and Galaxy Digital announced they had dropped
Silvergate as their banking partner after the company delayed
the release of its 2022 annual report, according to Reuters. 

 (Editing by Lauren Silva Laughlin and Sharon Lam)
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