{"id":615479,"date":"2023-03-08T07:49:30","date_gmt":"2023-03-08T13:49:30","guid":{"rendered":"https:\/\/news.sellorbuyhomefast.com\/index.php\/2023\/03\/08\/silvergates-collapse-may-spell-regulatory-trouble-for-crypto\/"},"modified":"2023-03-08T07:49:30","modified_gmt":"2023-03-08T13:49:30","slug":"silvergates-collapse-may-spell-regulatory-trouble-for-crypto","status":"publish","type":"post","link":"https:\/\/newsycanuse.com\/index.php\/2023\/03\/08\/silvergates-collapse-may-spell-regulatory-trouble-for-crypto\/","title":{"rendered":"Silvergate’s Collapse May Spell Regulatory Trouble for Crypto"},"content":{"rendered":"
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\"Consensus<\/p>\n

Christy Goldsmith Romero<\/span><\/p>\n

Commissioner<\/span><\/p>\n

U.S. Commodity Futures Trading Commission<\/span><\/p>\n<\/div>\n

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Explore the policy fallout from the 2022 market crash, the advance of CBDCs and more.<\/span><\/p>\n<\/div>\n<\/div>\n

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\"Consensus<\/p>\n

Christy Goldsmith Romero<\/span><\/p>\n

Commissioner<\/span><\/p>\n

U.S. Commodity Futures Trading Commission<\/span><\/p>\n<\/div>\n

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\"Consensus<\/p>\n

Explore the policy fallout from the 2022 market crash, the advance of CBDCs and more.<\/span><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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\"CoinDesk<\/picture><\/div>\n

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Nikhilesh De is CoinDesk’s managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.<\/p>\n<\/div>\n<\/div>\n

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\"Consensus<\/p>\n

Christy Goldsmith Romero<\/span><\/p>\n

Commissioner<\/span><\/p>\n

U.S. Commodity Futures Trading Commission<\/span><\/p>\n<\/div>\n

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Explore the policy fallout from the 2022 market crash, the advance of CBDCs and more.<\/span><\/p>\n<\/div>\n<\/div>\n

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\"Consensus<\/p>\n

Christy Goldsmith Romero<\/span><\/p>\n

Commissioner<\/span><\/p>\n

U.S. Commodity Futures Trading Commission<\/span><\/p>\n<\/div>\n

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\"Consensus<\/p>\n

Explore the policy fallout from the 2022 market crash, the advance of CBDCs and more.<\/span><\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Silvergate Bank had a really rough week, to the point where a not-insignificant number of people were waiting for the Federal Deposit Insurance Corporation (FDIC) to announce the bank had entered receivership after close of business Friday.<\/p>\n<\/div>\n

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You\u2019re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. <\/i>Click here<\/i><\/a> to sign up for future editions.<\/i><\/p>\n<\/div>\n

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The fall of SEN<\/h2>\n<\/p>\n<\/div>\n
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The narrative<\/h4>\n<\/p>\n<\/div>\n
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Silvergate Bank announced last week it had to delay filing its annual 10-K form because of questions it received from its independent auditors. In the same form, under the \u201cforward looking statements\u201d section, Silvergate announced it was facing bank regulator inquiries, a U.S. Department of Justice investigation, congressional scrutiny and concerns about its ability to be a \u201cgoing concern\u201d over the next year. Generally speaking, these are all bad signs.<\/p>\n<\/div>\n

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Why it matters<\/h4>\n<\/p>\n<\/div>\n
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Silvergate is (was?) the <\/i>bank in crypto. It counted some of the industry\u2019s biggest firms (in the U.S.) as its clients. The fact it\u2019s now in a position where it may soon fold is not a good signal for the rest of the industry, and gives regulators a prime example of what happens if the banking sector gets too close to crypto.<\/p>\n<\/div>\n

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Breaking it down<\/h4>\n<\/p>\n<\/div>\n
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Silvergate had a really bad week. Its stock is down 61% over the past week, with the bulk of that fall coming last Thursday, dropping its stock (SI) to $5.41. It\u2019s actually down 94% over the past year, and obviously a bit lower than its all-time high of $212.<\/p>\n<\/div>\n

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It\u2019s not inconceivable the bank will have to enter receivership in the near future. It may still recover \u2013 the bank may have more capital than we realize, or it may receive a rescue package from an investor \u2013 but a lot of its most prominent crypto clients have already left, and the bank shut down its most attractive product, the Silvergate Exchange Network, last Friday.<\/p>\n<\/div>\n

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Silvergate appears to have sold off billions of dollars worth of bonds at a market loss to keep up with withdrawals, which in turn meant it no longer met certain regulatory requirements that indicated it was perfectly fine.<\/p>\n<\/div>\n

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The main result is that crypto firms are going to have to look for other banks. Some companies will find this easier than others. The established titans of this industry will, I imagine, not have too many difficulties. If you’re a company with a history of operating without major issues, you’ll probably be able to convince a bank that what happened to Silvergate wasn’t your fault (and in a sense, it wasn’t).<\/p>\n<\/div>\n

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If you’re starting an enterprise, it may be more difficult. Startups in this industry have traditionally had difficulty gaining banking services, and that won’t be made easier by federal bank regulators warning financial institutions under their charge that they need to be careful, or maybe need permission, when dealing with crypto.<\/p>\n<\/div>\n

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On Monday, White House Press Secretary Karine Jean-Pierre said the Biden administration was monitoring the situation<\/a>, and that U.S. President Joe Biden would continue to call on Congress to do something. This isn’t likely to reassure banks either, to the extent they may want to wait for Congress to act.<\/p>\n<\/div>\n

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Banking services like deposits aside, companies may also have issues with accessing payment services, at least in the short term. Circle, for example, has already cut off its ACH support, at least temporarily<\/a>.<\/p>\n<\/div>\n

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A spokesperson pointed to Silvergate. \u201cAmid growing concerns about Silvergate Bank, Circle has accelerated plans to deprecate some services and transition others to additional banking partners, completing a process that began last year to reduce risk to our customers, our business and USDC. We are communicating with customers and have taken steps to ensure access to customer funds via alternative payment and redemption channels,\u201d the spokesperson said in a statement.<\/p>\n<\/div>\n

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All of this will become a backdrop to the regulatory response. Bank regulators have already gone out of their way to warn about crypto. But beyond that we’ve already heard from officials such as Acting Comptroller of the Currency Michael Hsu, who warned months ago there may be \u201ccontagion risk<\/a>.\u201d Just this week Hsu gave another speech<\/a>, where he said last year\u2019s FTX collapse reminded him of a major bank failure, Bank of Credit and Commerce International (BCCI).<\/p>\n<\/div>\n

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To date, despite the fall of FTX and the dozen or so bankruptcy filings last year, there hasn\u2019t been a huge risk of contagion from crypto to the traditional financial sector. That may finally be changing.<\/p>\n<\/div>\n

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To be clear, Silvergate didn\u2019t fail merely because it banked crypto. But if crypto companies rushing to withdraw their funds \u2013 creating a bank run \u2013 led to Silvergate needing to sell off its bonds, which in turn led to it being under-capitalized, which has now led to the bank coming close to receivership, then this was another victim of last year\u2019s massive failures and evidence of that contagion risk.<\/p>\n<\/div>\n

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Regulators are likely to continue warning that crypto is fraught with danger, and have a perfectly primed example to point to.<\/p>\n<\/div>\n

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It remains to be seen if Silvergate really does fail or if it finds a path to survival. It also remains to be seen just who will pick up its former clients \u2013 Signature Bank, the next-friendliest bank to crypto, or another of the myriad institutions out there or even a crypto-native company that has successfully run the gauntlet of the Federal Reserve Board application process.<\/p>\n<\/div>\n

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Stories you may have missed<\/h2>\n<\/p>\n<\/div>\n
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Grayscale\u2019s day in court<\/h2>\n<\/p>\n<\/div>\n
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Grayscale Investments will finally have its chance to argue the U.S. Securities and Exchange Commission has no choice but to allow it to convert its Grayscale Bitcoin Trust (GBTC) product into an exchange-traded fund (ETF).<\/p>\n<\/div>\n

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To recap: In June the SEC rejected Grayscale\u2019s bid to convert GBTC to an ETF<\/a>, citing common refrains about a lack of a robust surveillance-sharing agreement with a national securities exchange, the potential for market manipulation and TKTK. Hours later, Grayscale appealed the decision<\/a>, filing suit in the D.C. Circuit Court of Appeals in Washington, D.C.<\/p>\n<\/div>\n

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Disclosure: Grayscale is a subsidiary of Digital Currency Group, the parent company to CoinDesk.<\/p>\n<\/div>\n

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Grayscale received support in the form of five different amicus (friend of the court) briefs, signed by The Blockchain Association, Chamber of Digital Commerce, Coin Center and the Chamber of Progress; Coinbase; the Chamber of Commerce; NYSE Arca; and a group of individuals.<\/p>\n<\/div>\n

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Grayscale\u2019s main argument seems pretty straightforward: It\u2019s arguing the SEC\u2019s decision to disapprove its GBTC conversion \u2013 or indeed, any spot bitcoin exchange-traded product \u2013 despite its past approvals of bitcoin futures ETFs is \u201carbitrary to its core<\/a>.\u201d<\/p>\n<\/div>\n

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\u201cIts central premise \u2013 that the Exchange\u2019s surveillance-sharing agreement with the CME provides adequate protection against fraud and manipulation in the bitcoin futures market but not the spot bitcoin market \u2013 is illogical. Any fraud or manipulation in the spot market would necessarily affect the price of bitcoin futures, thereby affecting the net asset value of an [exchange-traded product] holding either spot bitcoin or bitcoin futures as well as the price investors pay for such an ETP\u2019s shares. Either CME surveillance can detect spot-market fraud that affects both futures and spot ETPs, or that surveillance cannot do so for either type of ETP,\u201d the company said in its summary.<\/p>\n<\/div>\n

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The company also argued the SEC was inconsistent about how it approached futures markets.<\/p>\n<\/div>\n

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For its part, the SEC argued that futures-based ETFs and spot ETFs \u201care fundamentally different products,\u201d with different surveillance-sharing agreements and oversight mechanisms.<\/p>\n<\/div>\n

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In a brief, the SEC tried to draw a clear distinction between bitcoin futures and spot bitcoin markets<\/a>, saying the futures products it regulates hold underlying assets that either trade only on CME \u2013 namely, cash-settled bitcoin futures \u2013 or cash and cash equivalents. Grayscale\u2019s proposed ETF would be based on actual bitcoin, which could trade on any crypto exchange, including those overseas.<\/p>\n<\/div>\n

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Similarly, for futures products, CME has surveillance-sharing agreements with NYSE Arca and Nasdaq, the SEC said, once again noting that CME is where the actual bitcoin futures contracts trade.<\/p>\n<\/div>\n

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\u201cBecause of CME\u2019s comprehensive surveillance measures and the one-to-one relationship between the regulated market (the CME) and the underlying assets (CME-tradable bitcoin futures), the Commission concluded that CME\u2019s surveillance \u2018can reasonably be relied upon\u2019 to capture the effect of attempts \u2018to manipulate the proposed futures ETP by manipulating the price of CME bitcoin futures contracts, whether that attempt is made by directly trading on the CME bitcoin futures market or indirectly by trading outside of the CME bitcoin futures market,\u2019\u201d the SEC\u2019s filing said.<\/p>\n<\/div>\n

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The judges seemed largely skeptical of the SEC’s arguments.<\/p>\n<\/div>\n

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This week<\/h2>\n<\/p>\n<\/div>\n
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