Fire at the Fiat Reserve Continues! How are Silvergate's bad debts from user deposits different from traditional banks?

The fire at the fiat treasury Silvergate continues to spread, with Silvergate claiming inability to submit annual reports on time, prompting various crypto partners to cut ties. Collaboration works both ways, with some cutting off ties and others being affected. Following Silvergate's termination of services for the crypto fund Digital Asset Capital Management, the fund is seeking help from other banks. Exchange Bybit also announced the temporary suspension of USD wire transfers, without specifying the names of the banks involved, leading to speculations about their connection to this incident.

Recap: Silvergate's inability to submit annual reports on time may lead to a "capital shortage" dilemma? Crypto partners are all distancing themselves, leaving crypto-friendly bank Silvergate with little support.

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SEN Service Terminated

Silvergate announced on its homepage: Silvergate has decided to terminate the Silvergate Exchange Network (SEN) service with immediate effect due to risk considerations. Other deposit-related services are still operating normally.

Silvergate's SEN network allowed customers to send USD and EUR 24/7, without being restricted by bank hours, and has been a significant revenue generator for Silvergate, bringing in $5 billion in revenue last year.

Bloomberg reported over the weekend that Digital Asset Capital Management is seeking help from other banks after Silvergate's exit. Digital Asset Capital Management, a cryptocurrency fund with $400 million in assets, used Silvergate's SEN to move funds in and out of Coinbase's platform. However, Coinbase has announced that it will no longer use Silvergate's financial services.

Bad Debt in Deposits?

The Washington Post's article titled "Silvergate's bad debts weren't its assets but its deposits" points out the unique situation of Silvergate: "Most bank runs happen because a bank's assets are so bad that losses would eat into customer deposits, but Silvergate’s situation was different."

Silvergate Bank, licensed in California, has been serving digital asset clients since its inception in 2013, with FTX, Gemini, and Coinbase as its clients. It quickly rose in the industry through its unique niche market, transitioning from a regional bank to a publicly traded company in a decade. It is known as the bank for crypto traders and exchanges, holding cash for many exchanges and promising immediate settlement of USD for cryptocurrency trades between customers through its SEN service.

The Washington Post describes Silvergate's deposits not as typical deposits but as assets from users of collaborating exchanges, more akin to the floating cash held by remittance companies like MoneyGram or Western Union.

Therefore, The Washington Post states:

"Silvergate’s only reason for attracting cash was to settle trades of crypto assets. If the trades stop, there’s no need to hold any funds there."

In other words, Silvergate's bad debts do not involve uncollectible receivables but refer to the unique nature of Silvergate's deposits, different from traditional banks, and its overly reliant single source of fund attraction, allowing partners to swiftly cut ties in case of unforeseen events.