Crypto traders are likely to lean more toward dollar-pegged stablecoins, after Silvergate Capital Corp., and its crypto-friendly lending affiliate, said last week it was at risk of “being less than well-capitalized” and discontinued its crypto-payments network.
USD Tether USDTUSD, +0.01%, the world’s largest stablecoin by market capitalization, saw its trading volume against bitcoin hit an record high last week, in comparison with the bitcoin-USD trading pair, according to research firm Kaiko.
The research firm also found that since 2017, the market share of dollar-to-tether trade volume, for Bitcoin trading pairs, had climbed from 3% to 92%, recently hitting an all time high in the aftermath of the FTX collapse.
Investors are turning to Tether, which is owned by Hong Kong-based iFinex, as U.S. regulators increase scrutiny on the crypto market, while Silvergate’s SI, -6.24% woes also have raised uncertainty about the future of crypto companies’ relationship with banks.
Banks have traditionally been reluctant to work with digital asset companies due to the lack of regulation, industry participants said. Stablecoins can be used to convert fiat currencies, like dollars DXY, -0.10%, into crypto assets. However, like other parts of the crypto complex, stablecoin issuers may prove unreliable, including because they can be lightly regulated or unregulated.
As one the few crypto-friendly banks in the U.S., Silvergate launched the SEN in 2017 to allow its crypto clients to send U.S. dollars seven days a week between their Silvergate accounts and the accounts of other Silvergate clients. The network became popular, with the volume of crypto payments handled by the network totaling $563 billion U.S. dollar transfers in 2022, according to Silvergate’s financial statement for the fourth quarter of 2022. At the end of 2022, the SEN network’s base of customers included 94 crypto exchanges and 894 institutional investors, among others.
Silvergate Corp. said last week in a regulatory filing that its subsidiary Silvergate Bank experienced a series of events that left it at risk of “being less than well-capitalized,” and executives were evaluating those events’ impact on its ability to continue as a going concern. It would also delay filing its audited 2022 annual report, it said.
Several crypto companies, including Coinbase Global Inc. COIN, -2.70%, Galaxy Digital, Paxos and Circle, said last week that they would cease all or part of payment transactions with the bank.
Silvergate declined to comment beyond its Wednesday regulatory filing.
“With the death of SEN, stablecoins will likely become even more ubiquitous among traders,” analysts at Kaiko wrote in a Monday report. “Rather than deposit your dollars with an exchange, you deposit them with a stablecoin issuer, receive stablecoins, and then transfer those to an exchange.”
Still, stablecoin issuers will need to interact with banks, and it would possibly lead to more concentration in crypto companies’ bank partners, according to the Kaiko analysts.
Signature Bank, another crypto-friendly bank, reportedly said in December that it will reduce its crypto deposits by up to 10 billion, according to several media reports.
As U.S. regulators increase their scrutiny of the crypto market, more digital asset companies might turn to the European banks instead, according to the Kaiko analysts.
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