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Silvergate and some paradoxes of the crypto universe

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He crypto universe born to challenge traditional financial system formedaccording to his gaze, for the central banks -uncontrolled issuers of money without backing-, and by financial institutions, parasitic entities that have the cow tied to monopolizing the financial business by appropriating the intermediation margins in boom timesbeing rescued by the governments (read taxpayers) in times of crisis.

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The evidence of these facts -according to the crypto universe- is very clear if the acceleration in the world inflation in recent years and the financial crisis of 2008.

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However, the heart of the crypto ecosystem, the bitcoins (and all the relatives that came and survived afterwards) inevitably needed (and need) to exist and procreate from the hateful fiat currencies (issued by central banks) and of the reviled banks.

Until one day (if it happens) crypto assets can function as generally accepted means of payment The entry and exit of the crypto ecosystem goes through the fiat world. Whether a new saver wants to invest initially, or when he needs to get rid of these assets to be able to carry out operations in the real world, he must (in most cases) resort to the currencies issued by central banks.

As regards the relationship of the crypto ecosystem and the traditional financial system Two simple examples can be mentioned where the first resorts to the second in order to function.

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One, when the saver delivers his money to a crypto market (Exchange) to be able to have those funds at all times and operate nimbly. In this case, the market or platform that receives fiat money from its clients must necessarily deposit these funds in some financial institution either payment platform to dispose of them when the saver decides reverse them.

Another example are the so-called guaranteed stablecoins by an underlying asset that supports the operation. For example, if an investor buys 1 tether (USDT), in order to receive that token, he must send a dollar to the issuing company, which must keep it within the financial system in liquid assets in order to be able to cope at all times to the potential bailout by the investor.

Part of the trouble this universe experienced in the last few weeks originated from this necessary relationship between crypto world and the traditional financial system.

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Courtesy: Global Investor

In the middle of the last decade, a Californian bank called Silvergate Capital Corp. decided to attract depositors from the crypto universe by offering multiple facilities to these new customers. Fundamentally, it created a platform (called SEN -Silvergate Exchange Network-) that allowed its banking clients to trade with each other to buy crypto assets 24 hours a day, 7 days a week.

In a few years, the entity attracted funds from major exchanges and of big american investors in these digital assets becoming the friendliest bank in america for this ecosystem.

However, the drop in value of crypto assets experienced in 2022 and the multiple scandals from different platforms (especially the platform called FTX) caused a large part of these crypto investors to abruptly withdraw their deposits from Silvergate, leaving the undercapitalized bank to face that rush. Between September 2002 and December last year, the bank lost u$s8,000 million in deposits (it went from US$12,000 to US$4,000 million in just three months).



After announcing losses of more than US$1,000 million for the last quarter of 2022 (which, according to the bank itself, seems to be underestimated), Silvergate had to lay off the use of its innovative SEN platform, and faces a Perfect storm that calls into question its continuity; its crypto clients continue to withdraw their deposits while regulators and US justice shine their spotlights on the behavior Of the entity. Silvergate’s share value fell by 98% since it reached its peak in November 2021.

Earlier this month, the world’s top crypto players in the USA: Coinbase, Circle, Paxos, Crypto.com, Bitstamp, Cboe Digital Markets, Galaxy and geminithey suspended their operations with Silvergate. Paradoxically, it was the withdrawals of deposits from big crypto investors those who caused the drop the friendliest bank to this universe, promoting a new bearish correction which affected all cryptocurrency markets.

Source: Ambito

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