Cryptowinter leads to Californian bank run

The problems in the crypto sector are seeping into the mainstream financial world. The fall of the crypto platform FTX shakes the Californian bank Silvergate and the crypto group Digital Currency Group.

It was a telling start to the year in the US financial sector: Three major banking regulators issued a joint statement on Tuesday about the risks of the cryptocurrency market for banks. These are the Federal Reserve system of central banks, the deposit custodian FDIC and the Office of the Comptroller of the Currency, which helps monitor the health of US financial institutions.

The essence

  • The bank run at the Californian institution Silvergate shows that the problems in the crypto sector can also affect traditional banks.
  • That bank run is partially related to the demise of crypto platform FTX.
  • Crypto group Digital Currency Group is also increasingly feeling the difficulties in the sector.

The three authorities are particularly concerned that unchecked crypto risks will contaminate the traditional financial sector. The warning comes on the heels of a turbulent year for crypto, with several industry accidents and abuses coming to light. One of the main farmers to stumble upon was the crypto platform FTX at the end of last year, the exact scope of which is still not clear.

Silvergate

The Californian bank Silvergate proves that the regulators’ concern is not a superfluous luxury. That institution started in 1988 as just another lender to businesses, but has boomed in recent years as it began to focus heavily on crypto customers. Silvergate even had plans to launch its own coin. The strong correlation with the crypto world caused the bank’s price to explode on Wall Street at the end of 2021.

In recent months, however, the draft has been in full swing. The stock crashed on Thursday. It had everything to do with the bank’s admission that it was the victim of a bank run during “a crisis of confidence” in late 2022. In the fourth quarter, digital asset customers raised more than $8 billion (€7.6 billion) in deposits. away, which largely dries up the bank’s liquidity.

Cover with FTX

To turn things around, Silvergate is cutting 200 jobs, 40 percent of its total, and raising new money by selling securities, albeit at a heavy loss. In addition, Alan Lane, the founder and CEO, received a letter last month from a number of US senators asking for clarity on the many dealings he had with fallen FTX boss Sam Bankman-Fried and his subsidiary Alameda Research.

8 billion

Outgoing deposits

Crypto bank Silvergate saw more than $8 billion in deposits disappear in a short period of time.

US regulators are worried that the problems in the crypto sector will seep even further into the mainstream financial world, especially now that more and more irregularities are coming to the surface. On Thursday, prosecutors filed a lawsuit against Alex Mashinsky, the founder and former CEO of the also-failed Celsius Network, for defrauding investors. Sam Bankman-Fried, who pleaded not guilty on Tuesday, has no less than eight charges hanging over his head. He faces life in prison.

Genesis

Partly because of the FTX fallout, Barry Silbert’s crypto conglomerate Digital Currency Group, an industry pioneer and serial entrepreneur, is also increasingly in trouble. Digital Currency Group is the parent of, among other things, the information service Coindesk, the fund manager Grayscale Investments and the broker and lender Genesis. The latter has again cut 30 percent of jobs after a first round of restructuring in August. As a result, the workforce has almost halved to 145.

Various media such as The Wall Street Journal reported on the restructuring, after which a spokesperson confirmed it citing the ‘unprecedented challenges for the sector’. They also have to do with the sharply declining interest in crypto-coins. Genesis is also still looking for a solution to the problems in its credit department and, according to various media, does not rule out a procedure to request protection against its creditors. Digital Currency Group, meanwhile, has also decided to close its asset manager HQ and has already laid off people itself.

The Winklevoss twins

The question is whether everything is going correctly at Digital Currency Group. Cameron, one half of the well-known American business twins Winklevoss, accuses Silbert of mixing all kinds of funds in his group, resulting in $900 million in client assets in his own crypto firm Gemini Trust now being tied up. Silbert has denied the allegations.

Finally, it was announced on Friday that the major crypto platform Huobi, headquartered in the Seychelles, is laying off a fifth of its 1,100 employees.

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