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The crypto-focused Silvergate, which announced its liquidation plans this week, is suffering from issues similar to the failed Silicon Valley Bank. That is, Silvergate’s calamity is due to rising interest rates, not the vagaries of digital assets. Silvergate faced several financial problems after the collapse of the FTX crypto exchange, a former client. In January, Silvergate reported massive Q4 withdrawals in light of the FTX crash. Then in February, the Justice Department launched an investigation into the bank’s dealings with FTX and its subsidiary Alameda Research. Silvergate warned investors last week that it might not last long. Its shares are down 85% this year. SI 1Y Mountain Silvergate Capital shares crashed. Despite all this, it is clear to many that cryptocurrency as a nascent and risky asset class was not Silvergate’s main concern. Rather, the problem is partly because Silvergate’s business is too focused on a high-risk industry like cryptocurrency. In addition, banks are affected by rising interest rates. [crypto] the industry needed to just sit with cash and not play the yield curve like the banks did,” said Caitlin Long, CEO of Custodia Bank, which also caters to crypto companies. She is a longtime critic of leverage and speculation in the cryptocurrency industry. Risk inherent in long-term bonds Silvergate invested customer deposits in long-term bonds in the face of the Fed’s tightening cycle, Long explained. As interest rates rose, the bonds lost value. Eventually, as customers lost confidence in Silvergate’s ability to continue to provide liquidity, the bank had to sell those bonds — and be aware of this loss of value. Silvergate was not alone in this, she added. what happened has nothing to do with crypto. This is due to the old-fashioned “short loans and long loans” business model, which is now generally recognized as unsuitable for banking in the digital asset industry.” announced a plan to raise more than $2 billion in capital to offset losses from the bond sale. In about two days, the Federal Deposit Insurance Corporation will force it to close, making it the biggest US bank failure since the global financial crisis.” The SVB was a case of a classic bank run combined with an asset-liability mismatch, its decline accelerated as depositors lost confidence around the same time SVB was forced to sell long-term fixed income securities at a loss – from where they were kept. balance sheet to satisfy withdrawals,” said Amit Sinha, head of multi-asset engineering at Voya Investment Management. Mismatch of assets and liabilities, not cryptocurrency risk. While SVB’s clients were predominantly focused on startups at the center of technology and innovation that could include cryptocurrencies, the bank did not specifically focus on digital assets. However, the situation with Silvergate appears to be attracting increased regulatory attention to the sector. Senator Elizabeth Warren, Massachusetts, was one of the first to take notice. “Silvergate Bank’s failure as the bank of choice for cryptocurrencies is disappointing but predictable,” she tweeted on Wednesday afternoon. “I have warned about the risky, if not illegal, activities of Silvergate – and have identified serious due diligence deficiencies. Now the clients should be healthy. [and] regulators should take action against crypto risk.” Separately, the Federal Reserve said on Thursday it is forming a “dedicated group of experts” to help it oversee the crypto sector. Perhaps the cryptocurrency needs to be more clearly regulated in the US. Gaining momentum in the US, Hong Kong is planning to legalize retail trading of cryptocurrencies as part of a larger drive to become a global crypto hub, reportedly with quiet backing from China. regulatory clarity in the form of regulation of the Crypto Asset Markets or MiCA. It’s also true that crypto banking companies come with high liquidity risks, as three U.S. banking regulators warned in February, and that financial institutions wishing to serve them must have strict risk management protocols in place. r the financial system, the economic background and, in particular, the growth of interest rates. “These are financial institutions that rely a lot on deposits that are under a lot of pressure,” said Jung-Yu Ma, chief investment strategist at BMO Wealth Management. “The whole concern about deposits leaving banks, the cost of holding those deposits in terms of having to pay higher interest rates so that investors don’t flee to areas where they can get higher returns, it’s really hitting the financial sector and it’s bleeding. into the cryptocurrency space. “Crypto aspirations are greatly helped by the banking system, which is doing well and has trends in its favor,” he added. Banks “want to avoid areas that may experience the most stress. What probably comes to mind naturally is the crypto space,” he said.
Credit: www.cnbc.com /
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