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US financial services provider for the crypto industry, Silvergate Bank, goes into liquidation as senator raises concerns of contagion in the traditional financial sector. Meanwhile, UK regulator questions the integrity of crypto firm applications and an UAE crypto exchange partners with Mastercard.

Silvergate Bank, previously a banking partner for most major crypto firms, has announced that it will wind down its operations and voluntarily liquidate all of its assets.

In a , parent company Silvergate Capital said it will shutter the bank due to “recent industry and regulatory developments”, and is now considering “how best to resolve claims and preserve the residual value of its assets”.

Silvergate Capital stock dropped 38 percent after the wind down statement was published on Wednesday (March 8), bringing the stock 99 percent below its all-time high from November 2021.

Previously, the bank’s Silvergate Exchange Network (SEN) had facilitated real-time settlement between some of the largest crypto counterparties, including FTX, Coinbase, Paxos, Crypto.com, Gemini, Kraken and Circle.

Last week, when the bank announced that it would discontinue SEN, Silvergate stock was likewise hit by heavy selling.

As of this week, the SEN page on Silvergate’s website has , but as recently as Q4 last year, SEN was an average daily volume of $1.3bn.

Regulators seek transparency

In its latest statement, Silvergate gave little indication as to what exactly had triggered the wind down at this time, but a look at the bank’s previous statements offers some clues.

In January, Silvergate the US Securities and Exchange Commission (SEC) that it would be unable to publish its audited full-year 2022 results on time due to the impact of “additional losses”.

In Q4 last year, Silvergate a $1bn net loss, bringing its total net loss for the year to $948m, based on previously published results.

Silvergate also revealed that in Q4, almost 70 percent of its deposits from crypto firms had been withdrawn since the previous quarter, falling from $11.9bn to $3.8bn.

Even before the publication of its Q4 2022 earnings, Silvergate had already caught the attention of US lawmakers due to its exposure to the FTX bankruptcy.

In early December, Senators Elizabeth Warren (D-MA), Roger Marshall (R-KA), and John Kennedy (R-LA) to Silvergate seeking answers about the bank’s transfers of FTX customer funds to Alameda Research, an FTX-affiliated trading firm.

“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” the senators wrote.

“The public is owed a full accounting of the financial activities that may have led to the loss of billions in customer assets, and any role that Silvergate may have played in these losses.”

One month earlier, Silvergate CEO Alan Lane had a statement on the company’s exposure to FTX, informing shareholders that FTX accounted for “less than 10 percent” of its total deposits from crypto firms.

“As a federally regulated banking institution that is well capitalised, we maintain a strong balance sheet with ample liquidity to support our customers’ needs,” Lane added.

From home loans to crypto: a new kind of bailout

In hindsight, as Senator Warren has since discovered, these assurances turned out to be misleading.

In late January this year, Warren directly to Lane to express “disappointment” at Silvergate’s “evasive and incomplete” response to her previous letter.

Aside from failing to explain how Silvergate was unable to spot the FTX bankruptcy before it happened, Warren complained that Silvergate had turned to taxpayer money to bail itself out.

As crypto firms withdrew their money from the bank following the FTX collapse, Silvergate turned to the Federal Home Loan Bank (FHLB) of San Francisco for a cash injection.

By the end of 2022, Silvergate held $4.3bn in FHLB advances, which made up the vast majority of the bank’s $4.6bn cash holdings.

“By using the FHLB as its functional ‘lender of last resort’, Silvergate has further introduced crypto market risk into the traditional banking system,” said Warren.

“If Silvergate were to fail,” Warren added, “it could leave the American taxpayer holding the bag.”

UK regulator seeks 'higher-quality' crypto firms

In the UK, this week the new chief executive of the Financial Conduct Authority (FCA), Nikhil Rathi, appeared before the Treasury Select Committee for a on accountability in financial services.

Among the topics discussed was the quality of applications by crypto firms to the UK’s temporary permissions regime, a set of minimum standards for anti-money laundering (AML) controls.

Asked about buy now, pay later (BNPL) firms that have to make similar applications, Rathi said he hopes the quality of their applications is “of a different standard” to that of the crypto sector.

“By any historical experience, crypto was really exceptional to us in terms of the quality and frankly the integrity of the answers we were receiving from some of the firms that were applying,” said Rathi.

Rathi added that one of the lessons the FCA has learned from this experience is to communicate its expectations more clearly.

As covered by VIXIO, Nikhil reminded the committee that it has published new guidelines for prospective applicants from the crypto sector.

“We are setting out, clearly, the kinds of best practices that we expect for applications from firms, such that when they do apply to us, we don’t have some of these problems,” he said.

Rathi was also asked how the FCA can protect consumers from losses on crypto investments, following reports that 80,000 UK customers have lost money due to the FTX bankruptcy.

“Whatever we do on regulation, we are not going to be able to put in place a framework that protects consumers from losses, and absolutely and under no circumstances whatsoever, should people expect compensation through this,” Rathi said.

Mastercard launches Bybit Card despite banking issues

Finally, Mastercard has announced that it has launched a new debit card in partnership with Bybit, a UAE-based crypto exchange.

The Bybit Card is issued by UK-based Moorwand, and will allow Bybit users in the UK and EU to use their crypto balances to pay for items and make cash withdrawals.

In a , Bybit said that payment requests will automatically convert crypto balances into EUR or GBP, depending on the client's country of residence.

However, the launch of the Bybit Card comes only two days after Bybit that it has suspended all USD wire transfer deposits and withdrawals, including those made via SWIFT, until further notice.

Bybit said the suspension is due to “service outages” at its “end-point processing partner”. Although unconfirmed by Bybit, it is speculated that the partner in question is Silvergate Bank.

Previously, it is known that Silvergate had USD deposits to Bybit by routing them through an account belonging to Circle.

Circle would then transfer the equivalent amount in the USDC stablecoin via the ethereum blockchain to the user’s Bybit account.

Until this week, this method of depositing to crypto exchanges was common among exchanges.

Crypto.com, for example, used this method, but this week it that it has suspended all USD deposits and withdrawals via Silvergate, including those via Circle using USDC.