SPIRIT Blockchain – Weekly Wrap-up

Here’s what happened in blockchain and crypto this week. 

The collapse of U.S. banks Silicon Valley Bank (SVB) and Silvergate (SI) sent shockwaves through markets on Thursday and Friday. Today, US regulators shut down the tech-focused lender SVB amid a bank run and a failed attempt to raise fresh capital while the FDIC took control of the bank and its deposits. SVB’s failure marks the second-largest collapse of a bank in U.S. history, according to the WSJ. The lender’s stock had been halted after falling more than 81% since Wednesday. Earlier this week, crypto-friendly bank Silvergate announced to wind down operations and voluntarily liquidate Silvergate Bank. The lender’s failure is likely to pose a challenge for US crypto companies given the industry’s reliance on Silvergate’s services in the past. SVB’s unexpected collapse rattled global markets and unsettled bank investors, with the S&P 500 sinking to a seven-week low as financials sold off while shares of several regional banks were halted. Cryptoassets also fell sharply earlier this week amid the Silvergate news. Bitcoin dropped below $20,000, after falling by more than 15% this week – its lowest point in almost two months. Ether also suffered sharp losses after a lawsuit against KuCoin brought by New York’s attorney general referred to the cryptoasset as an unregistered security. 

On Wednesday afternoon, California-based Silvergate Capital Corp. (SI) said that it would be “voluntarily liquidating” the bank’s assets, in part due to “recent industry and regulatory developments.” Last week, the crypto-friendly bank said it would have to delay the filing of its annual 10-K report due to questions from its auditors which triggered a 50% drop in the SI stock price. Silvergate’s statement said that “the bank’s wind down and liquidation plan includes full repayment of all deposits. The company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.”

The end of Silvergate is a major blow for crypto since the registered US bank has been at the center of the growth of the industry in recent years, providing a variety of services to crypto exchanges and many other crypto firms. JPMorgan noted that Silvergate operated as a gateway for more than 1,000 “institutional crypto market participants including major crypto exchanges, miners, stablecoin issuers, market makers and digital asset fund managers that have been using its network to transfer fiat currency between their Silvergate accounts and the accounts of other Silvergate customers”.

The shutdown will leave a large gap to fill, in part because other major banking partners such as Signature Bank have announced to reduce their crypto exposure or, as in the case of Metropolitan Bank, exit the industry altogether. Moreover, new crypto banks such as Custodia have been denied access to the Federal Reserve System by the Fed recently due to “safety and soundness” risks. Meanwhile, Kraken is moving ahead with plans to launch its own bank despite a challenging regulatory environment, the company’s chief legal officer told The Block.

Investment bank Morgan Stanley expects more regulatory scrutiny for crypto on-ramps, i.e. banks that offer services to crypto companies, in the wake of the Silvergate wind-down. In a recent research report, the bank noted coordinated action by regulators to highlight the risks in U.S. banks offering crypto services. Last month, the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency issued a joint statement to U.S. banks in which they pointed out liquidity risks related to crypto assets. In early February, Castle Island Ventures’ Nic Carter published a much-discussed blogpost in which he warned that “the US government is using the banking sector to organize a sophisticated, widespread crackdown against the crypto industry”. 

Market Overview

The global cryptoasset market capitalization currently amounts to $936 billion – down from $1.075 trillion on Friday last week, with bitcoin accounting for 39.9%. Among the Top 30 crypto assets by market cap, tokens were down across the board for a second consecutive week. The price of bitcoin (BTC) decreased by 15.2% to $19,889 over the week, while the price of ether (ETH) fell by 14.6% to $1,407. The total value locked (TVL) in DeFi is sitting at roughly $45 billion – with Ethereum (excluding Layer 2s) accounting for more than 59.5% of TVL.

This Week’s Headlines

• US Department of Justice appeals billion-dollar Binance.US acquisition of Voyager assets
• New York State Attorney sues KuCoin, claims that ether is an unregistered security
• CME crypto derivatives volumes and open interest hit new all-time highs 
• Coinbase announces Wallet-as-a-Service product to simplify Web3 onboarding
• Kraken moves ahead with plans to launch its own bank despite a challenging regulatory environment
• Blockchain.com to suspend operations of asset management division, Bloomberg reports
• Immutable makes C-suite hires from Meta and Ava Labs
• Blur bid incentives appear to skew the market given NFT offers above buy now prices
• Hedera distributed ledger shuts down services after “network irregularities”
• Hacker in $1.6 million Tender. fi exploit returns stolen funds, gets bounty reward
• Animoca-backed Forkast Labs creates S&P 500 of NFTs

Notable Deals and Fundraising

• Ethereum Layer 2 Scroll reaches $1.8 billion valuation in new funding round, The Block reports
• Serial entrepreneur Trevor Traina raises $25 million to build Kresus, a Web3 superapp
• Token-based crypto payroll startup Toku raises $20 million in a round led by Blockchain Capital
• Zero-Knowledge proof technology firm Proven raises a $15.8 million round
• Web3 developer tools provider Cubist raises $7 million in a seed round led by Polychain Capital
• Bitcoin investment platform Relai raises $4.5 million at a $20 million valuation
• Gyroscope unveils $4.5 million in funding as it prepares to launch new “unique” stablecoin
• Brazilian-based stablecoin issuer ECSA closed a $3 million pre-seed funding round
• Web3 email solution EtherMail raises $4 million in a round led by veteran venture investor Tim Draper
• Solana-based NFT marketplace Tensor raises $3 million in seed funding led by Placeholder VC
• Multi-strategy crypto investment firm Parataxis Capital aims to raise $50 million fund
• Alpha Sigma and Transform Ventures partner on new $100 million crypto-focused funds

Manuel Trojovsky, Head of Crypto Investments & Research

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