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The Fragile Nature of Deposits in the Digital Era

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On March 6, according to the Washington Post, if Silvergate Capital Corp. fails, it may become the first bank to fail due to non-performing liabilities rather …

The Fragile Nature of Deposits in the Digital Era

On March 6, according to the Washington Post, if Silvergate Capital Corp. fails, it may become the first bank to fail due to non-performing liabilities rather than non-performing assets, because its bad debts are deposits rather than assets. The deposit of Silvergate is not a deposit in the normal sense. Its characteristics are more like the floating cash held by remittance companies such as MoneyGram International or Western Union. The only reason Silvergate attracts cash is to settle the transaction of entering and leaving a specific group of assets. However, the deposit movement speed of Silvergate may be much slower than the floating speed of this cash, as long as the market’s interest in cryptocurrency decreases, The depositors will begin to disappear.

Washington Post: Silvergate’s bad debts are deposits rather than assets

Interpretation of the news:


The news that Silvergate Capital Corp. may become the first bank to fail due to non-performing liabilities instead of non-performing assets highlights the fragile nature of deposits in the digital era. Silvergate’s deposits are not traditional deposits but more like floating cash that serves the transactional needs of a specific group of assets. In other words, the only reason people deposit cash in Silvergate is to buy and sell cryptocurrencies or other digital assets.

The problem with this kind of deposit is that it relies heavily on market sentiment and interest in cryptocurrencies. If the market hype dies down or regulatory uncertainties increase, depositors are likely to start disappearing. This is because they have no real incentive to keep their cash in Silvergate unless they are actively trading digital assets.

Furthermore, the deposit movement speed of Silvergate may also be slower than the floating speed of this cash. This means that as the market interest decreases, the time it takes for depositors to withdraw their funds may be longer than expected. Moreover, the sudden withdrawal of too many deposits at once may cause liquidity issues for the bank, leading to a failure.

The precarious nature of non-traditional deposits is not unique to Silvergate. Similar concerns have been raised about remittance companies such as MoneyGram International or Western Union, which also hold floating cash in the form of user deposits to serve transactional needs. These companies are also vulnerable to sudden withdrawal of deposits, as seen during the pandemic when people reduced their remittance transactions due to economic uncertainties.

In conclusion, as the world moves towards a more digital and decentralized financial system, the need for new deposit models may arise. Traditional deposits, which rely on people keeping their cash in banks to earn interest, may not work for the digital era. Instead, we may need better models that take into account the transactional nature of digital assets and the volatile market conditions that accompany them.

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