The recent operational issues faced by Silvergate Bank’s Silvergate Exchange Network (SEN) have raised concerns about the reliability of traditional banking channels in the cryptocurrency market. Now, there are proposals that the use of stablecoins may be the key to preventing another instance of this scenario in the future.
The Tragic Silvergate Saga
Silvergate Bank is one of the leading banks in the cryptocurrency industry that provides services to cryptocurrency exchanges and other digital asset businesses. However, the nature of its business was way different when it was established.
The bank started as a thrift and loan service provider in San Diego County in the 80s. In the aftermath of the subprime crisis in 2014, the company was forced to explore other ventures to mitigate its losses, and that’s when it turned to the burgeoning cryptocurrency market. With that, it developed SEN to infiltrate the digital realm.
SEN offered accounts to companies providing services in the Bitcoin space. It stood out against the competition by allowing streamlined and seamless payment transfers between Silvergate customers 24/7.
Major troubles began following the collapse of FTX though. The all-time low market sentiments led to the decline of the bank’s digital asset deposits and it was already bracing for a bank run. So, the company made efforts to restructure its balance sheet, strategies, and policies to keep its business intact amid the pressure.
The ensuing chaos has led to concerns about the security and stability of the cryptocurrency market. As a result, the event has opened up some realizations regarding the crucial role of stablecoins pegged with fiat according to a market research firm.
How Stablecoins Can Prevent Another Silvergate Scenario
Stablecoins are cryptocurrencies that are designed to maintain a stable value against a particular asset, such as the U.S. dollar or another fiat currency. They are often used as a way to trade cryptocurrencies without being exposed to the high volatility that is typically associated with traditional cryptocurrencies like Bitcoin or Ethereum.
These digital assets offer several benefits to the cryptocurrency market, chiefly stability and liquidity. The stability of stablecoins makes them an attractive alternative to traditional cryptocurrencies, which can be highly volatile.
Stablecoins can guarantee the liquidity of cryptocurrency exchanges in several ways:
- First, they can be used as a trading pair against other cryptocurrencies, which can make it easier and faster to buy or sell cryptocurrencies.
- Second, stablecoins can be used to transfer funds between exchanges without having to rely on traditional banking channels, which can be slow and expensive.
- Furthermore, stablecoins are often issued by reputable companies or backed by reserves, which can provide traders with greater confidence in their value and stability. This can help increase their adoption and use in the cryptocurrency market, which can in turn ensure the liquidity of cryptocurrency exchanges.
The recent operational issues faced by Silvergate Bank have highlighted the importance of stablecoins in the cryptocurrency market. Stablecoins can provide a reliable alternative to traditional banking channels, which can be subject to delays and other issues. Additionally, stablecoins can help ensure the liquidity of cryptocurrency exchanges, which is crucial for maintaining an efficient market and preventing volatility.
The passage of proposals related to these may be met with scrutiny in the US though, considering its rather antagonistic approach in just about anything related to crypto right now. Nevertheless, this will surely serve as an emerging opportunity for the European market that possesses a more welcoming crypto infrastructure for big players in the industry.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he was handling several crypto projects for both the government and private sectors as a Project Manager for a consultancy firm.