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March 3, 2023

🥛 A major crypto bank has the plague…

Gm. This is Milk Road, the tenderloin of crypto newsletters. Juicy, delicious, and no fat in sight.

Here’s what we got for ya today:

  • WTF is up with Silvergate?

  • Will the Feds bring down the hammer?

  • Funding Friday!

IS SILVERGATE NEXT TO FALL?

Silvergate-gate is here, y’all: the crypto-friendly bank might be the next domino to fall.

Silvergate’s stock plummeted ~60% on Thursday after the bank revealed it won’t be able to file its annual report with the SEC by the March 16th deadline.

Why? Because it needs two extra weeks to assess all the damage to its finances caused by 2022’s crypto crash, as well as figuring out if it can even continue operating for the next 12 months. Uh-oh.

Silvergate is one of the two big banks that strayed from conservative waters and started banking crypto exchanges and other crypto service providers over the last few years.

If you’ve used FTX, Binance, or Coinbase, you’ve indirectly used Silvergate, which handles ~$11B in total assets.

It's hard to overstate the impact that a Silvergate implosion could have on the crypto markets. Silvergate is a so-called “bridge” to crypto, with ~1,600 crypto clients that helped ~80% of all funds flow into and out of the digital asset markets.

And if Silvergate does fail, it would also deal blows to established financial players like BlackRock, which has a large stake in the crypto bank.

So… how did we get here?

  • Investors withdrew $8.1B from Silvergate after FTX, its client, blew up in November

  • To cover those withdrawn funds, the bank had to sell off debt at a $718M loss

  • It revealed a $1B loss for Q4 and a $949M loss for 2022 overall, versus a $76M profit for 2021

  • Silvergate had to repay the $4.3B advance it got from the Federal Home Loan Bank (this is a new detail Silvergate gave in its notice on Wednesday)

  • The DOJ is now probing Silvergate over its dealings with FTX/Alameda

  • And short sellers have now made Silvergate’s stock the most shorted stock in the country

So what now? Institutional players are heading for the exits.

Coinbase, Galaxy Digital, Gemini, Circle, Crypto.com, and Paxos have already said they’ve cut ties with the bank. It’s safe to assume the rest of Silvergate customers will be scrambling to withdraw holdings as soon as they can.

You’ve heard of the FTX saga; now get ready for the Silvergate saga. We will be keeping our eyes on this developing situation, more from crypto Twitter below:

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WILL THE FEDS MAKE AN EXAMPLE OUT OF SILVERGATE?

Lately, the Feds have been hard at work insulating TradFi from the crypto space:

  • Three big financial regulators warned banks in January that crypto risk shouldn’t be allowed to infect the banking system

  • The SEC wants to make it harder for crypto firms to hold client assets for money managers

  • The U.S. Federal Reserve said Nah to crypto firm Custodia’s request to access the central bank’s payment system

Given all that, this would be brutal timing for Silvergate to collapse and for the crypto world to need someone to take its place.

Silvergate was processing over $100B in transaction volume quarterly, which will now need to flow through other channels:

(Credit: TheBlock.co)

It will be hard to find a buyer or for another bank to step in. Everyone is spooked by the crypto space with the current regulatory threats, plus it has never been easy for the industry to find banking partners.

The Milk Road Take:

Even if the government can’t outright ban crypto, it can cut the industry off at its knees by making it harder to move fiat in and out of the space.

If exchanges can’t find reliable banking partners, customers will have to jump through hoops to purchase crypto, which would be another hurdle standing in the way of mass adoption.

This would be the crypto version of having to go to the ATM at the dispensary because they can’t accept your credit card. Womp womp

FUNDING FRIDAY

This week, $92.9M was invested in Web3 companies. Here’s who got the bag:

Factor got $7.5M to build DeFi infrastructure for asset managers, protocols, and investors. Turning DeFi to WeFi.

NeoSwap got $2M to set up online parties for people to sell NFTs live. 🎵No more parties in LA, please baby, we only party on blockchains.🎵

insrt finance got $2.2M to build a protocol so anyone can own a fraction of a blue chip NFT. NFT holders now can get returns for NFTs sitting in their wallets, and any Joe Shmo off the street can own a piece of a Bored Ape or Crypto Punk.

DigiFT got $10.5M to build a regulated DeFi solution for asset owners, issuers and investors. Call ‘em the Gensler repellent.

If you wanna see all the companies that got funded, check ‘em out here.

MILKY MEME

🤣🤣

That's a wrap for today. Stay thirsty & see ya next time! If you want more, be sure to follow our Twitter (@MilkRoadDaily)

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.