Crypto Markets Plunge Amid Silvergate Concerns

Digital assets native to Layer 1 blockchains have taken a beating over the past week, weighed down by fears that the industry’s key banking partner might go belly-up.

Silvergate Capital, a U.S. bank that services crypto companies, said in a filing this week it was “less than well capitalized,” would miss a deadline to file audited financial statements, and was evaluating whether it could remain in business — news that prompted several of the country’s largest crypto companies to sever ties.

Silvergate Shares Slump 60% in Two Days As Crypto Firms Scramble To Sever Ties

Crypto-friendly Bank Says It’s “Less Than Well Capitalized”

The Defiant

Crypto assets and the broader equities markets have tended to move in lockstep but diverged sharply on Thursday.

The Nasdaq and S&P 500 are both up around 2% over the past day, according to data from The Defiant Terminal, while Bitcoin and Ether have both dropped more than 5%.

Other Layer 1 blockchains have fared even worse. Cardano, Solana and Polygon are down around 8% over the past week.

Among major DeFi protocols, only Maker and Synthetix have seen their tokens appreciate more than 10% over the past week. The governance tokens of Uniswap, Aave and Curve are down more than 4%, 5% and 7%, respectively, in that span.

Regulatory Crackdown

Issues at Silvergate come on the heels of a regulatory crackdown this year that has sent shockwaves through the crypto industry.

The Securities and Exchange Commission has brought several enforcement actions against crypto firms, and commission Chairman Gary Gensler has implied that almost every digital asset aside from Bitcoin is a security, subject to strict regulatory oversight.

More troubling, however, has been a series of stern messages from U.S. banking regulators, who have stressed that holding crypto assets is “inconsistent with safe and sound banking practices.”

“I think people under-appreciate how terrified the Silvergate developments have made the federal government,” a source at a D.C.-based crypto advocacy group told The Defiant last month. “Their need to tap the federal home loan [banks] made people afraid that counterparty risk in crypto would spill over into the traditional financial system.”

The San Diego-based bank jumped into crypto years ago and serviced a number of firms and protocols. In January, it shocked watchdogs when it had to borrow $3.6M from Federal Home Loan Banks to stem a run on its deposits.

Last month the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a joint statement on crypto — the second in as many months — highlighting the industry’s liquidity risks.

And, on Wednesday, crypto-wary U.S. senators sent a letter to Binance, saying publicly available financial statements from the world’s largest crypto exchange suggest it is a “hotbed of illegal financial activity.”