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The voluntary liquidation of Silvergate, crypto’s go-to bank, and subsequent regulator action to seize Silicon Valley Bank sent shockwaves through the industry.
While depositors will be made whole, the shockwaves the industry is feeling are no longer from the concept of funds lost, but rather the loss of industry-friendly banks that were pillars of the sector.
Most large, brand-name banks wouldn’t work with a small venture fund, a tech startup, or a crypto company – not to mention an exchange. But Silvergate, Silicon Valley Bank and Signature saw these as valued clients.
Everyone from OKX’s U.S. exchange OKCoin to CoinDesk itself has been impacted by the demise of these three institutions.
“We're going to struggle with banking for a while,” William Quigley, a Tether co-founder and CEO of non-fungible token exchange WAX, told CoinDesk in an interview. Quigley, who left Tether in 2015, is disappointed with its current management.
Holding long-dated, government-issued debt, purchased when interest rates were low, then having to jettison it at fire-sale prices to shore up liquidity when startup clients stopped raising money and started spending, was not a great move by banks. But this action should have only been a challenge and not a fatality, he says.
“It’s not the first time in the history of Silicon Valley that a weird phenomenon happened,” he said. “Has there ever been a rush of money into a sector, which then goes into [SVB], and gets burned off as the companies are making payroll? It’s literally how the system works!”
Quigley says that around June 2022 someone in management should have noticed and moved to sell off the portfolio and take the losses, or bring in more deposits.
“I've been an audit committee chairman and a bank auditor. I know the conversation that happens when deposits are going down at an accelerated rate and our investment portfolio is being impaired to the point where we don’t have enough money to pay off depositors,” he said.
Management should have been in touch with the Federal Reserve in January, and the Fed should have put the bank in some sort of supervisory wind-down then.
'It’s banking 101'
The problem that’s going to emerge from this, he says, is a lack of trust. SVB was regulated by multiple federal and state agencies, had a clean audit opinion, and was rated as investment grade by a federally licensed rating agency, making it seem like a good bank.
“It’s unfair to expect depositors to know more than all the regulators and regulated entities that reviewed the bank,” he said, pointing out that the U.S. can’t have a “South American” banking environment where minimal funds are kept in the bank because of low institutional trust.