US based Silvergate Bank – a lender to crypto companies including the collapsed crypto platform FTX – has announced it will liquidate its business, raising questions about the long-term viability of the crypto market.
The San Diego-based bank had earned a reputation as the go-to bank for cryptocurrency in the US, reportedly attracting up to $14bn in customer deposits in 2021. Silvergate’s demise is just the latest in a series of ripple effects following the collapse of the world’s leading crypto exchange, FTX, in November 2022.
FTX’s collapse led to a dramatic drop in Silvergate’s customer deposits and share price, which eventually led to the announcement that it plans to liquidate its business.
The collapse of Silvergate bank reflects wider turmoil in the crypto market, which has shaken investor confidence and seen the industry enter a so-called ‘crypto winter’.
However, GlobalData thematic analyst Suneet Muru believes that Silvergate’s collapse may actually hold some long-term benefits for the crypto ecosystem. “A lot of these bankruptcies are slowly unravelling the chain of crypto lending that has led to this domino effect in the first place. If the value in the industry was built on a poor foundation, then this needs to be cleared out for a rebuild in the future,” he says.
Furthermore, in the case of Silvergate’s downfall, the company’s liquidation is voluntary. This may afford investors some confidence that the company has a solid plan to repay customers in full as they have claimed, Muru points out. “They have however been opaque about their ties to FTX when questioned by US regulators, so there are two sides to the argument,” he adds.
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Investor confidence in the crypto market stands at an all-time low since the cryptocurrency crash of 2022, which started with the collapse of US stablecoin Terra in May of the same year. This created a domino effect within the industry of failing crypto-related businesses, culminating in the downfall of FTX after allegations of fraud and financial malpractice.
Evidence that the industry is living through a crypto winter includes a drop in venture financing of crypto-related start-ups. Funding peaked in 2021, when it stood at just under $20bn, compared with $13bn in 2022, according to GlobalData.
Other casualties within the crypto ecosystem include the NFT market, which tanked in mid-2022 following a steep drop in the value of cryptocurrencies and dwindling investor confidence.