• Trouble is brewing in the crypto sector due to a lack of regulation around know-your-customer and anti-money laundering (KYC/AML) policies.
• Silvergate Capital, one of the few U.S. banks that works closely with the crypto sector, has recently seen its depositors flee and its stock price drop.
• Silvergate Bank has been at the nexus of banking services for the entire industry, servicing 1,677 digital asset customers with $9.8 billion in digital asset deposits.
Overview
Developments around crypto on- and off-ramps have been heating up as Federal Reserve Member Bank Silvergate Capital watched its depositors flee and its stock price plummet due to a lack of regulation surrounding know-your-customer and anti-money laundering (KYC/AML) policies in the industry.
Silvergate Bank
Along with Signature Bank, Silvergate is one of the key U.S. banks that works closely with the crypto sector because there are very few entities in the regulated U.S banking system that are willing to work with crypto firms to access established USD on- and off-ramps due to issues such as unregistered security offerings and frauds within the broader industry. Silvergate Bank has been at the nexus of banking services for the entire industry, servicing 1,677 digital asset customers with $9.8 billion in digital asset deposits since November after FTX’s collapse as it became apparent that they played a role in serving FTX and Alameda by giving them access to USD rails..
Risk Factors
The ongoing risk is a complete bank run on Silvergate deposits which can be liquidated if necessary through leveraged loans which are collateralized by bitcoin However, despite CEO’s comments about their loan book having faced zero losses or liquidations so far, their stock performance over the last two weeks tell a much different story indicating potential trouble ahead for companies who are moving money or processing payments or transactions within this sector.
Crypto Distinction
It should be noted that there is a clear distinction between bitcoin and what is generally referred to as “crypto” but these lines remain blurred for many regulators thus making it more difficult for crypto firms to get into established USD on-and off ramps without facing legal issues from government agencies or risk losing customer deposits due to bank runs such as what we have seen from Silvergate Bank recently .
Conclusion
In conclusion ,the lack of regulation surrounding know your customer policy along with other issues such as unregistered security offerings contribute significantly towards why there are only a handful of regulated US banking systems willingto work withcryptocurrency firms which presents unique challenges for those who process payments or transactions within this sector as we have seen recently from Silvergate Banks bankrun caused by fear amongst their depositors