Silvergate insolvency would be a fresh crisis in already fragile crypto ecosystem

All right, it's time for today's check check. Let's get out to Deirdre Bosa for more on the drama and saga that is Silvergate Capital and it's very, very bad. No good week. Deirdre. Very bad. No good indeed. So let me put this in context.

If FTX was the biggest exchange to fall, Genesis, the biggest lender, Silvergate may now represent the potential failure of the banking piece of crypto. And it kicks off a fresh new crisis in the space shares. Absolutely plunging this week after the bank said it had to delay the release of its annual report and was evaluating its ability to quote, continue as a going concern. Now, insolvency would be a fresh crisis in this already fragile ecosystem rippling across the sector and new. And that is because Silvergate, it has functioned as the so-called rails of crypto connecting the US crypto industry with the traditional financial system. So it plays a major role here and major players on all sides. They are now quickly pulling away from that infrastructure circle coin based Paxos on the crypto native side.

JPMorgan on the traditional Wall Street side, which has covered the bank now readjusting and downgrading its rating to underweight and withdrew its price target. This all raises the question yet again, how many more dominoes are there to fall in the crypto space and how much more money can be lost? Well, still a lot. One corner that I have watched in question very closely over the years is stable coins. Its entire value is derived from confidence, a belief that one circle or one tether, one USDC or one UST is worth one US dollar. Now, amid the many crises of confidence and crypto tether, take a look at this is the largest stable coin by market cap, some 70 billion dollars. It has shown some cracks. You can see in this chart that it has unpegged from the dollar a few times over the last 12 months.

Circle has remained relatively more stable. But as we await their long promised audits, they remain vulnerable in a still very vulnerable industry. And Silvergate is just the latest to show that guys. So, Deirdre, I guess, I mean, if you take a look at the way sentiment has played out here, we know that Silvergate has been a huge catalyst for this. If there is something else, if you're going to look at this, if there is something else to keep a close eye on besides those stable coins, how about the more established ones? We've talked a lot today about the bitcoins and the ethers of the world, and even they have been showing some signs that that that relative strength that we've seen that bull rush that we saw at the beginning of this year starting to run out of some steam. Is this the beginning of this or is this just maybe some churn and chop like we talked about in the last segment? Well, I think the failure of so many other tokens has kind of underlined in a way the legitimacy of a Bitcoin and an Ethereum. That's what a lot of folks in the industry would say.

And remember, these are decentralized coins. And a lot of what we're talking about that is failing right now are centralized things. There's a lot of irony in that, of course, this is supposed to be a totally decentralized system. But that is why some would argue at least the sort of evangelists would argue that FTX and Silvergate and Genesis are all going down because at the end of the day, these are centralized exchanges or banks or lenders. Tether is that interesting one and stable coins because again, these are also centralized. But you could argue that they're the rails even more than a Silvergate because this is how people get money in and out of different coins. As to the question of Bitcoin and Ethereum, though, Dom, to answer you directly, I think CHOP, who knows, there's so many more things that could fail in the system, but you would hear anyone in the space argue that at least these ones are going to be around.

They could go further down, certainly. Dear Dr, I'm just struck by the fact that this is really the first time we're talking about crypto kind of transferring to the real financial system. You know, up until now, we've seen an extraordinary drop of wealth without much broader ripple effects. Silvergate is a clear example of ripple effects. I wonder if there are any others. Well, again, I point back to stable coins. These are essentially money market funds and they hold huge amounts of short term debt and treasury.

So if they failed, that is generally pointed to as the black swan of the industry that could actually, you could see these ripple effects in the traditional financial system because they are so integrated. But again, we don't really know the full extent. They have remained relatively stable, but there are huge questions. There was even a piece in the Wall Street Journal today looking at some of the untoward practices that Bitfinex, the company that owns Tether, has engaged in over the years. We know that it's under investigation by the Department of Justice. So this is certainly one to look at that is more integrated than any of the things I mentioned into the traditional financial system. That's an excellent point.

Dear Jardin, thank you as always. Dear Jardin Bosa for this edition of Tech Check.

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