A Crypto Update

Crypto die-hards have had a rough go of things over the last 15 months. Markets have become extremely fragile as investors weigh the pros of nascent finance and the inherent risks that come along with that — take the FTX collapse for example. 

We’ve now come to an inflection point in the industry — a time when it seems like not much is going right, but hopeful that all the crypto collapses we’ve seen lead to better infrastructure and investor protections. 

The Silvergate situation

• Silvergate basics:  Silvergate Bank had quickly and quietly become one of the biggest players in the crypto industry, offering traditional financial services to major crypto institutions like Coinbase, Kraken, Gemini, and now the debunked FTX. Behind the scenes, Silvergate allowed these big names to transact in USD 24/7 with no wait times through their Silvergate Exchange Network (SEN), which became an integral part of these institutions’ processing power. 
• Silvergate debacle: In the wake of FTX’s collapse, Silvergate’s clients were spooked — 60% of their deposits were pulled from the bank in just one quarter, creating an $8.1B loss. In short, the implosion of Silvergate was partly because it was crypto’s bank of choice (all USD-backed stablecoin issuers banked with Silvergate) and partly due to mismanagement of their balance sheet. And just last week, Silvergate announced it was shutting down its bank and liquidating its assets.
• The consequences: With very few banks willing to touch crypto, Silvergate’s collapse creates liquidity issues and will force more crypto companies’ funds offshore. It also interrupts stablecoin operations as most traditional banks don’t allow their crypto clients to transact in USD 24/7. USD-backed stablecoin issuers were using Silvergate’s SEN to assist with minting and burning their coins and to facilitate transactions related to them.

Industry-wide happenings

• Market doldrums: Crypto’s big players have been mostly meandering around in a downward holding pattern ever since their steep drop-off in June 2022. After a series of bankruptcies that led to market dismay, an ongoing spree of scandals and controversies has kept the bears fed for the last 9 months. 
• In the meantime: Crypto isn’t dead, but hibernating. Investors and innovators alike are trying to sort themselves out in the aftermath of a problematic era that’s unveiled a lot of cracks in their infrastructure. So, in the meantime, a lot of learning and reconfiguring is going down. 
• Recent happenings: As of late, crypto worries have been less about bankruptcies and more about the regulation of the industry. Remaining giants like Binance and Coinbase are moving ahead with acquisitions amid pushback from the SEC and sidecar issues with the stablecoin infrastructure taking center stage. 
• Crackdown: Recently, the SEC has been perusing stablecoin offerings, trying to discern whether or not they’re deemed “securities.” Most recently, the SEC ordered Paxos, a blockchain infrastructure platform responsible for minting the industry’s third-largest stablecoin Binance USD, to stop issuing the stablecoin. 
• Industry changing: Stablecoins represent a critical on-ramp or gateway to the world of crypto as they can provide instantaneous transacting power and liquidity that holding dollars often doesn’t. And as of late, stablecoins have become even more popular as crypto investors grow increasingly savvy and privy to their benefits — dollar-dominated trading pairs are basically transactions from dollars (or any traditional currency) and crypto, and these have fallen drastically from 400 to 326 over the last year. This is a big deal as it means that fewer investors are trading dollars for crypto, often opting for alternatives like stablecoins to transact.

What’s next for crypto

What’s next for crypto will come down to how creators, investors, and regulators deal with the continued challenges being thrown their way. The main obstacles on the horizon come in the form of stablecoin regulation, stricter accounting and transparency requirements, reducing contamination and overlap (FTX), and creating higher barriers to entry to mitigate bad actors.

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