• Due to the departure of Silvergate, important payment channels in the crypto industry are no longer available
• Stablecoins could increasingly represent a bridge between fiat currency and cryptos
• Opportunity also for European financial service providers?
Silvergate Bank was considered the largest crypto-friendly bank in the US. According to “BeInCrypto”, around 90 percent of their deposits came from the crypto industry, because Silvergate was one of very few institutes to provide an important interface for the crypto world. In order to buy and trade Bitcoin and other cryptocurrencies, investors must at some point interact with the traditional banking system to deposit fiat currencies. Many institutional investors and digital asset companies use the “Silvergate Exchange Network” (SEN) platform, an instant payment network with which exchanges, investors and market makers can exchange large sums of money in US dollars without any time delay and around the clock could move. SEN thus served as an important point of contact for transferring US dollars to crypto exchanges or making transfers between crypto companies. According to MarketWatch, at the end of 2022 Silvergate counted 894 institutional investors and 94 crypto exchanges among its customers, including Binance.US and Coinbase. In all of 2022, $563 billion was processed through SEN, according to the news site.
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However, when Silvergate announced at the beginning of March that Silvergate Bank could soon be “less than well capitalised”, that the continuation of the business was questionable and that the presentation of the annual financial statements was postponed, the SEN platform was also switched off shortly afterwards. About a week later, the crypto bank announced that it was completely ceasing operations and initiating orderly processing.
According to the digital asset data provider Kaiko, many large partners stopped processing payments via Silvergate at the first indication of problems at the crypto bank. Since with Silvergate and especially SEN one of the “few fiat payment channels in the crypto industry” has now disappeared, the liquidity of the sector could suffer, write the crypto experts at Kaiko on their website. “In particular, it is becoming more difficult to use fiat capital quickly via exchanges, since the signature bank is now one of the only banking alternatives,” it says – but this has now also been closed by the US financial regulator. The end of Silvergate – and now also the Signature Bank – could now also accelerate an already existing development and put stablecoins more in the limelight.
The importance of stablecoins in crypto trading is likely to continue to increase
“With the death of SEN, stablecoins are likely to become even more ubiquitous among traders,” the crypto data provider’s experts believe. Because stablecoins are already another widespread entry into the crypto world and could play this role even more in the future. “Instead of depositing your dollars with an exchange, deposit them with a stablecoin issuer, receive stablecoins, and then transfer them to an exchange,” Kaiko outlines an alternative route into the crypto universe that may now be gaining popularity.
According to the data provider, a decreasing use of the US dollar in the crypto world can already be seen – in favor of stablecoins. For example, “the number of new fiat trading pairs listed on exchanges worldwide has fallen with the rise of stablecoins,” writes Kaiko. An analysis showed that, for example, the number of new dollar trading pairs on the exchanges fell from 400 in 2021 to 326 in 2022. In addition, since the FTX collapse, the US dollar’s market share in bitcoin trading has declined in favor of the world’s largest stablecoin Tether (USDT), as well as stablecoin USD Coin (USDC) and the euro. The market share of the Bitcoin-Tether pair recently reached 92 percent in trading volume compared to the Bitcoin-Dollar pair, marking an all-time high.
But even stablecoins are not completely without risks. For example, MarketWatch warns that stablecoin issuers may be unreliable as they may have little or no regulation. And Kaiko also sees a great difficulty if stablecoins should further expand their role in the crypto universe. “However, the problem is that stablecoin issuers still need access to a crypto bank, so the risk is now further concentrated,” writes the data specialist. Because with the loss of Silvergate, there are even fewer banking partners available for crypto companies than before.
Are European institutes stepping into the breach?
“For now, the dollar and dollar-pegged stablecoins remain the foundation of the crypto economy, but growing complications with USD payment lanes could reverse this trend,” Kaiko also warns. European banks could benefit from this, because crypto companies could possibly turn to them more in the future. With “an increasingly unfriendly US regulatory and banking environment, an opportunity may arise in European markets,” the crypto experts say. An upward trend can already be seen in the new euro trading pairs – in contrast to the new dollar pairs. Their number has recently increased significantly: from 96 in 2021 to 165 in 2022.
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