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Introduction
On January 5, according to the Wall Street Journal, the crypto-friendly bank Silvergate has processed $8.1 billion in withdrawals after the collapse of FTX, and cryptocurrency-related deposits have plummeted by 68% in Q4. In order to meet withdrawal needs, Silvergate has liquidated its assets and liabilities The debt held on the table and suffered a huge discount loss.
R 3 PO will analyze the impact of this incident on the prosperity of the encrypted banking industry from three perspectives: the Silvergate incident, the encrypted banking industry, and the case of the competing product Abra.
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Part 1 Silvergate suffered a huge run due to the FTX incident
In the early days, Silvergate (SI) was originally a community retail bank located in California, mainly providing financial services to local small and micro enterprises. With the transformation into an encryption-friendly bank and providing bank settlement services for Coinbase, Gemini, and the current scandal-ridden FTX exchange and trading company Alameda Research, Silvergate achieved a qualitative transformation and landed on the New York Stock Exchange at the end of 2019 .
The concerns of investors have been verified by the market in the near future.
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At the end of the fourth quarter, total digital currency deposits fell to $3.8 billion, down 68% quarter-on-quarter, with deposits as low as $3.5 billion during the quarter, and Silvergate’s customer bankruptcy-related deposit losses amounted to $150 million. According to the 8-K disclosed by Silvergate on November 16, its digital currency deposit size was US$9.8 billion, which was US$2.2 billion less than the average digital currency deposit of US$11.9 billion in the third quarter of 2022.
Source: SP Global
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Silvergate sold $5.2 billion of bonds held on its balance sheet in Q4 2022 to meet withdrawal needs, and suffered huge discount losses. The $718 million the bank has lost on selling debt since 2013 has far exceeded its total profits. This resulted in a loss of $718 million. At the end of the third quarter, the company also had about $427 million in HTM securities portfolio losses that were not recorded on book. Judging from managements statement on the period-end balance sheet, fair value securities at the end of the quarter were approximately $5.3 billion (company cash was approximately $4.6 billion).
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Layoffs and cuts to business
Silvergate announced that it will lay off 40% of about 200 employees, which is expected to result in a cumulative cost of 12 million US dollars related to employee severance pay and benefits, and said it will cut business, and decided to shelve its own plan to develop digital currency through the acquisition of Diem for 196 million US dollars. Because the company is no longer eager to launch blockchain payment solutions in the current market environment.1) the company may be subject to further potential regulatory fines; 2) the future ushers in a weaker cryptocurrency market, stricter encryption regulations and lower than expected deposit growth; 3) considerable uncertainty in the cryptocurrency regulatory environment may As a result, the companys stock price continues to decline, and SIs business and development may continue to be in a downturn for a long time.
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Part 2 may usher in the end of some unprofitable encrypted banks in 2023
As of October 22, about 80 financial institutions under the supervision of the Federal Deposit Insurance Corporation have expressed interest in cryptocurrency-related activities, of which about 24 are actively participating, hoping to provide services from the $1.2 trillion global digital asset market. In particular, crypto-friendly banks serve the widest range of institutional and retail users because they stand as a bridge between legal tender and digital currency.
Source: Abra Company Data
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In the large industry of cryptocurrency storage, there are subdivided industry markets such as custody, banking, and CeFi, and each subdivided industry participant also provides a diverse product portfolio. Compared with Coinbases exchange attributes, Signature and Silvergate only provide relatively The basic cryptocurrency deposit and withdrawal functions, and CeFi institutions such as Celsius and BlockFi provide complex financial products, but the security and compliance cannot be regulated, and the development path of encrypted banks is to cover as many products as possible on the compliance road Requirements and functions to gain benefits.
Source: Abra Company Data
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Crypto Asset Bank Business Model
The main income of banks comes from interest income and non-interest income. Non-interest income, also known as fees, is not the main source of income for banks; behind the core of bank income is net interest income. When you deposit cash into a bank account, the bank may offer you a 1% interest rate, which is interest expense to the bank (they pay you). This cash will then be lent to another customer at 3% and this is the banks interest income. Net interest income is the spread between interest income and interest expense, and the only way to create that spread in a competitive market is to take some risk. The two most common are: credit risk: the risk that the borrower will not repay; and interest rate risk: the risk that market interest rates will change if you lend out for more than a day.
In cryptocurrencies, there are two important risks: liquidation risk: the loan is overcollateralized, but you expect to be able to liquidate the collateral to avoid any loss; protocol risk: the blockchain is code, and code can be exploited to cause loss. The banks we are analyzing today are all full reserve banks and do not take these risks.
In the real world, differences in deposits between banks are fairly small because regulations, such as Basel III, use the Liquidity Coverage Ratio (LCR) and High Quality Liquid Assets (HQLA) to define how much high-quality liquid assets a bank should keep. level of funding. Homogeneity is created.
As weve seen, every bank has one goal: to increase the amount of deposits in the bank so they can charge the difference between the funding rate and the investment rate, among other fees. R 3 PO believes that encrypted banks are the same as traditional banks. Their business profits come from the non-interest income and net interest income generated in the deposit-payment-loan chain of capital flow. The business model of encrypted asset banks benefits from the following businesses:
Transaction fees are charged for fluctuations in the overall capacity of the cryptocurrency market and changes in transaction volume.
Deposit accounts that attract cryptocurrencies charge account-related fees,
Charge interest to crypto-collateralized lending clients
Fees are charged for the flow of funds generated by linking Defi and NFT entrances
Charge credit card users interest fees and rebates from card issuers and merchants
Charge management fees and performance fees for self-operated asset management business
R 3 PO believes that for cryptocurrency banks, how to manage the balance sheet to meet the constraints of solvency and liquidity, while optimizing the spread between funds and investment rates will determine who becomes the king of the track, and the winner will be is a trillion dollar company.
However, as the market value of cryptocurrencies has dropped from nearly US$3 trillion in November 2021 to below US$1 trillion at present, the confidence of investment institutions in the cryptocurrency industry is being shaken, and the businesses of participants in the cryptocurrency banking circuit have also been greatly affected. Influence.
Provident Bancorp Inc. Delays Third Quarter 10-Q Filing As It Assesses Real Loss Levels From Troubled Cryptocurrency Miners
Metropolitan Banks cryptocurrency-related deposits fell by $485.9 million in the third quarter of 2022, about 70% of which came from Voyager Digital Ltd
Signature Bank customers have $24.67 billion in digital asset-related deposits as of Q3 2022, and the bank said it will reduce cryptocurrency-related deposits to $8-10 billion by Q1 2023
R 3 PO believes that as the leaders of the encrypted banking circuit shrink their businesses, some encrypted banks that are still unprofitable will face the double dilemma of revenue generation and financing in 2023, or even the end.
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Part 3 Abra bear market continued to bleedR 3 PO got the news, as a popular player on the encrypted banking track,Abra just completed $22.6 million in bond financing in December 2022, and has just disclosed that it is laying off staff and restructuring its business.
Encrypted investment management company Abra is restructuring several of its business lines and considering cutting costs as a buffer against a bear market, according to three people familiar with the matter cited by online media.Founded in 2014, Abra is an encrypted asset financial service company operating for global institutions and individuals, providing services including encrypted asset transactions, custody, investment, interest collection, lending, payment, and credit cards. Due to the rapid expansion of the encryption market in 2021, Abras business will usher in explosive growth. In September 2022,Abra announced plans to launch a digital asset bank Abra Bank is expected to obtain the first US banking license with full regulatory approval in January 2023.
Will enable U.S. citizens to deposit and bank with digital assets in a manner similar to traditional banking. The bank plans to set up institutions in every state in the United States and become the first regulated cryptocurrency bank in the United States, and plans to launch a global project, Abra International, to provide services to customers outside the United States.
Summary of key messages from Abra 2022:
As a card issuer, cooperate with American Express to provide customers with an encrypted credit card with a cashback rate of 2.5%
Focusing on encrypted institutional users to solve industry pain points is expected to smooth industry cycle fluctuations
In 2022, the loss is serious, and the company has a big survival crisis
Abras various business data reference 2020-2021 business data is very eye-catching, and it is worth integrating Abras international layout. The launch of Abra International will target (Canada, EU, Japan, etc.) overseas markets.
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Source: Abra Company Data
Highlights of the Abra 2023 roadmap:
Defi/NFT: Provide institutions and individual customers with access to Defi applications and protocols, and provide NFT custody and storage services
Cash management: Provide cash usage services for real-time conversion of encrypted assets and legal tender
US bank license: Wyoming SPDI bank charter; Ex-US bank license: Bermuda DABA
However, the data in the first half of 2022 shows that what is worrying about Abra is that in a banking industry with high user retention attributes, the user retention rate of using Abra for more than 6 months has dropped below 50%, even considering the negative impact of the macro environment , there is still room for improvement in this data. At the same time, the average monthly transaction volume of customers has also decreased by 90% from February to March this year, and this data is likely to remain at a low level in the 2022-2023 cryptocurrency contraction environment.
Source: Abra Company Data
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Abras financial situation is worryingAbras debt-to-asset ratio is relatively high,
Its parent company Plutus Financial holds a total of $533M in assets in its 2022 H1 balance sheet, of which $496M is stablecoins and various cryptocurrencies, and $525M in debt.Abra faces problems such as reducing expenses, reducing losses, and improving profit margins.
In the Plutus Financial H 1 2022 profit loss and surplus statement, the revenue decreased month-on-month, and the loss expanded rapidly. In the first half of 2022, the total income was $23 M, but the loss was $42 M, of which the gross profit in March and June was negative.Referring to the companys losses from April to June, Abras cash flow will have problems in the second half of 2022.As for how long the US$22.6 million can be supported, Abras timely layoffs and business line adjustments have responded in part.
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Financing and Valuation
In September 2021, Abra received US$55 million in financing, led by Ignia and Blockchain Capital. Other investors in this round included Kingsway Capital, AmEx Ventures and CMT Digital Ventures. For this round of financing, referring to the last round of financing and changes in Cap Table, it is roughly estimated that the last round of financing accounted for 22% of Abra, and the post-investment valuation of Abra’s last round of financing is estimated to be about $ 250-$ 300 M.
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R 3 POs view on Abras market outlook
Abras financial model forecasts and past valuations are based on optimistic expectations of the macro encryption market, and the risk of a downturn in the macro environment will greatly affect Abras ability to acquire customers and retain users. The low return of the market will reduce the attractiveness of Abras asset management products and return income expectations.
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epilogue
With the arrival of 2023, whether Abras follow-up business and license planning development can be realized will determine its subsequent customer growth and financing progress. Whether the encrypted banking track can be revived directly depends on the degree of hotness and coldness of the cryptocurrency macro environment. Under the increasingly stringent regulatory environment, encrypted banks will be farther and farther away from blockchain fundamentalism and gradually embrace it. regulatory trends.
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Disclaimer: There are risks in the market, and investment needs to be cautious. Readers are requested to strictly abide by local laws and regulations when considering any opinions, viewpoints or conclusions in this article. The above content does not constitute any investment advice.
