Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
Correction: The subject line for yesterday’s newsletter incorrectly said Binance.US was approved to buy assets from Galaxy Digital. The seller is Voyager Digital. We regret the error.
Bit Worried
Crypto-friendly Silvergate Bank will “voluntarily liquidate” its assets and shutdown its operations, the firm’s holding company said Wednesday. The bank, which recently revised its losses to over $1 billion in Q4 2022, plans to repay all deposits in full during the winding down process. Bitcoin trading volumes dropped 35% in the past 24 hours following Silvergate’s announcement, which is surprising to some traders because trading activity typically increases during volatile moments. The total crypto market cap has dropped below $1 trillion, led by losses in top coins like Polygon and Solana. Finally, investor fears were also stoked by a series of BTC transactions totaling $1 billion in value, which turned out to be U.S. authorities transferring recovered proceeds from a dark market hack.
Survival of the Fittest
Crypto exchange Crypto.com is struggling to maintain its fiat on-ramps amid the crypto-banking turmoil, and can only provide euro-denominated banking services in the European Economic Area. The exchange recently lost the ability to accept USD deposits due to issues with its banking partners. Gemini, too, reportedly lost its bank account at JPMorgan, according to CoinDesk sources. Gemini had banked with the Wall Street titan since 2020. Elsewhere, Sam Bankman-Fried-founded hedge fund Alameda Research will sell its interest in Sequoia Capital to the Abu Dhabi sovereign wealth fund in a $45 million cash deal pending a Delaware bankruptcy court’s approval, court documents filed Wednesday show. The news comes as FTX plans to introduce a $4 million bonus program to attract and retain staff amid its ongoing bankruptcy process.
Just Dreaming?
BITMEX co-founder Arthur Hayes has introduced the idea of a bitcoin-backed stablecoin called NakaDollar (NUSD), as an alternative to fiat-based stablecoins reliant on baking infrastructure. The token would require participating crypto exchanges to maintain NakaDollar’s USD peg. Meanwhile, Web3 music platform Audius is implementing a NFT gating feature to allow artists to release exclusive content to token holders. Finally, on Wednesday, Yuga Labs announced new details for the second test of its gamified Otherside metaverse platform – including a two-hour “narrative experience” on March 25. The Bored Ape parent company will allow up to 10,000 Otherdeed NFTs holders to participate.
Sound Bites
“Silvergate had to be perfect because of the industry they were in. They weren’t and they’ve paid a heavy price for it.
– Bianco Research LLC strategist Jim Bianco, on CoinDesk TV’s “First Mover”
The Takeaway: Silvergate-Gate
Silvergate Bank, perhaps at one time the most important financial institution in crypto, will wind down after a period of cataclysmic withdrawals and a failed bailout from a federal mortgage backer. The bank’s conversations with the FDIC last week, reported to be a way to avoid a shutdown and shore up liquidity in retrospect, look like the nail in the coffin rather than a sign of life.
Silvergate, which began during the savings and loan era and was the first bank to see an opportunity in crypto, essentially became a financial zombie after overgrowing itself in a volatile sector.
It took on a massive amount of crypto deposits ($13.2 billion at the end of September) and, like all banks, invested those in safe yield-bearing assets like U.S. Treasuries and other bonds. However, following the collapse of FTX, a wave of customer withdrawals and required payments on a Federal Home Loan Bank loan forced the bank to sell off assets before they reached maturity causing a mismatch – it reportedly lost over $1 billion last in Q4 2022.
No lie, the situation isn’t great for crypto. Bitcoin is trading down significantly on the news, and there are possible spillover effects to worry about. But this moment is also an opportunity for many. Who and what – apart from the short sellers who already made their profits – could benefit from Silvergate-gate?
Other banks
At the first sign of blood in the water a number of crypto firms including Coinbase, Paxos and Galaxy switched to Silvergate’s top competitor, the New York-based Signature Bank. Signature, despite announcing some months ago that it would be curtailing its exposure to the crypto industry, could stand to benefit significantly – but is hardly the only bank or credit union that could see an opportunity. Even as banking industry overseers caution traditional-finance firms from dealing with crypto companies, many crypto firms remain well-capitalized (as the $8 billion worth of withdrawals from Silvergate would imply) – and need to park that somewhere. And that’s exactly what due diligence is for!
Stablecoins
On Monday, Kaiko analysts reported that “stablecoins will likely become even more ubiquitous among traders,” with the “death” of the Silvergate Exchange Network, or SEN, an internal system Silvergate created to allow its clients to easily swap capital, which was shutdown prior to the bank’s unwinding. In fact, on centralized exchanges, the volume of stablecoin transactions rose to 90% from 79% last year, replacing in particular USD-based trading pairs, CFA Conor Ryder noted. U.S. corporate stablecoin issuers are having problems of their own getting banking status, and many will be affected by Silvergate’s collapse.
Europe
Unlike the U.S., the European Union has been taking a proactive view towards regulating the crypto economy. The Markets in Crypto-Assets Act (MiCA) is a broad set of rules expected to go into effect soon, providing clarity for both crypto companies and financial institutions that would serve them. The ongoing banking crisis in the U.S. could only catalyze the trend of firms looking overseas to set up shop. One indication of this, perhaps, as Ryder noted, “the BTC-Euro pair hit its highest level of market share vs. [USD] ever last week, nearly tripling in market share in the space of a few weeks.”
Payments providers
On Monday, crypto banking firm BCB Group CEO Oliver von Landsberg-Sadie told CoinDesk’s Ian Allison that his company’s payments processor is accelerating plans to add U.S. dollar capabilities to help fill the hole left by SEN. BCB launched its real-time settlement network, the BCB Liquidity Interchange Network Consortium, or BLINC, in mid-2020 and currently handles euros, British pounds and Swiss francs. Institutions like BCB, which on-ramp banks into crypto, could become increasingly valuable as a way to absorb some of the risks.
Starbucks Serves Up Its First Premium NFTs at $100 a Pop (Decrypt)
Staked ETH Withdrawals Could Be Imminent (The Defiant)
SEC v. Ripple: Could The XRP Case Go To Trial? (Blockworks)
Ceramic releases tool that awakens its ‘storage for web3’ protocol (The Block)
Buying guns with crypto a constitutional right, argue lobbyists (Protos)
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