• Silvergate Capital, a Federal Reserve Member Bank, has seen its depositors flee and its stock price plummet.
• This is due to the lack of regulation around KYC/AML policy in the cryptocurrency sector as well as unregistered security offerings and fraud.
• Silvergate has been providing USD rails to crypto firms like FTX and Alameda, but this situation could lead to a bank run on their deposits.
Trouble Brewing In Crypto-Land
Regulatory Issues in Cryptocurrency Sector
The crypto sector has lacked regulations around know-your-customer (KYC) and anti-money laundering (AML) policies, as well as issues with unregistered security offerings and plenty of fraud. This has prevented many entities in the regulated U.S banking system from working with crypto firms who need access to established USD on- and off-ramps.
Silvergate Capital & Depositor Fleeing
Federal Reserve Member Bank Silvergate Capital is one of few banks that works closely with the crypto sector. Unfortunately, this has resulted in depositors fleeing and their stock price plummeting; FTX alone accounted for less than 10% of their deposits. Despite CEO reassurances that loan books have faced zero losses or liquidations so far, there is still a risk of a complete bank run on Silvergate deposits if things continue along this trajectory.
Monitoring Situation Since November
Since November 2020 — when FTX collapsed — Bitcoin Magazine PRO has been monitoring this situation closely due to Silvergate’s role in providing USD rails to FTX and Alameda. The CEO’s comments sound reassuring but the stock performance over the last two weeks tells a different story.
Conclusion
The lack of regulation around KYC/AML policy in the cryptocurrency sector as well as unregistered security offerings and fraud have presented many challenges for companies who are trying to move money or process payments/transactions within this industry. Although Silvergate is one of few entities willing to provide these services, it could be facing an extreme concentration issue with its customers leaving en masse unless something changes soon— potentially leading to a complete bank run on all deposits if left unchecked.
