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Understanding the difference between US and Swiss crypto banks

Silvergage, a well-known US crypto bank, experienced a bank run to the tune of $8.1 billion during the collapse of cryptocurrency exchange FTX. In the process of the bank run, Silvergate had to go through extraordinary efforts to shore up liquidity, selling the US treasuries on their books & even taking $4.3 billion in advances from the Federal Home Loan Banks (FHLB) of San Francisco, losing more than $1 billion - all of its profits since 2013. On the other side, publicly better-known Swiss crypto banks have experienced massive inflows counted in billions, with Sygnum Bank publicly reporting inflows of CHF 845 million in Q4.

Given the different outcomes, one would think that US and Swiss crypto banks live in a parallel universe, but the truth is that the difference in outcomes is due to the way those crypto banks operate. Silvergate takes on customer deposits on-balance sheet and invests the proceeds in US treasuries, while the Swiss crypto banks have customer deposits in an off-balance sheet custody, holding them in segregated accounts.

The US crypto banks, such as Silvergate & Signature, are well-known in the industry for their offering of infrastructure that crypto shadow banking players (hedge funds, market makers & exchanges) use for fast settlement. The Silvergate Exchange Network (SEN) and Signature's SigNet are settlement layers that instantly transfer crypto assets between the world's largest crypto traders. For example, a large hedge fund and a liquidity provider can execute a trade and then settle the transfer of assets (i.e. effectively do an atomic swap) on a real-time basis via the crypto bank's settlement networks, at very low costs, instead of going for settlement through slow & outdated fiat banking infrastructure, which can take several days. In the process of taking clients deposits, those deposits are held “on balance-sheet”, hence the clients deposits are liabilities on the books of the crypto bank, and with those deposits the crypto banks purchased US treasuries, with the intention to hold them till maturity to earn income. Unfortunately, the bank run on US crypto banks happened during the time period when yields on US treasuries rose significantly, hence as they were selling those treasuries to shore up liquidity, having mark-to-market losses that wiped-out billions of profits.

On the other hand, Swiss crypto banks do not hold assets on their balance sheet, since our kind Swiss regulator FINMA has set the risk-weighting of crypto assets up to 800% of capital, meaning they will have to be fully & overcapitalized, making it capital inefficient and economically unprofitable to have those assets on the books. In essence, the Swiss crypto banks operate as an off-balance sheet custodian with a banking license, which very much spared those players of the contagion & collapse of crypto shadow banking ecosystem.

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