Crypto Banking Race Warrants Watchdog Vigilance

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Reuters

Reuters

NEW YORK (Reuters Breakingviews) – Alan Lanes’ dreams may have crumbled, but his bank has not. Silvergate Capital, a deposit taker for cryptocurrency firms, said on Thursday it was forced to hastily raise funds and whip assets after digital asset customers withdrew nearly 70% of their balances. It’s a disaster for Lane and his investors. For the American banking system and the households that depend on it, there is something to reassure.

What happened at Silvergate was a classic and rare bank run these days. Crypto firm deposits fell to $3.8 billion in December from $11.9 billion in September. The panic was partly caused by the bankruptcy of bankrupt exchange FTX, one of Lanes’ clients. It doesn’t help that the government only insures deposits up to $250,000 and that institutions probably have a lot more than that in their accounts. To meet the demand for liquidity, Silvergate has had to sell securities it holds and tap wholesale funding markets.

Although bad, it could have been much worse. Silvergate had not blocked customer deposits as loans, but was instead piling its $15 billion balance sheet with government bonds and other easy-to-sell assets. It has approximately $1.1 billion in approved loan commitments to customers, secured exclusively against bitcoin, but those have not recorded any losses. Instead of using deposits as lending fuel, Silvergate instead treated them as lubricant for the Silvergate Exchange Network, with its payment product actively discouraging customers from parking more funds than they needed.

Silvergate is also an outlier in other respects. Its capital in September was equivalent to about 40% of its risk-weighted assets, about four times more than most major banks. This may in part be due to Lanes’ conservatism. But banking regulators have also kept crypto on a leash: they warned on Tuesday that they are closely watching banks with crypto-focused business models. Banks cannot hold crypto directly. Silvergate has multiple agencies, from the Federal Reserve to the California financial regulator, breathing down its neck.

The Lanes Bank is nonetheless today a bit of itself. It cut around 40% of its workforce and backed out of launching a blockchain-based payment product. Shares have fallen 90% in less than six months. It sure is embarrassing. But for now, that’s all. If a go-to crypto bank can lose most of its deposits without failing or wreaking havoc on other institutions, that suggests the firewall between digital and traditional finance is holding up.

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BACKGROUND NEWS

Silvergate Capital said on Jan. 5 that deposits from cryptocurrency customers fell to $3.8 billion as of Dec. 31, a 68% drop that led the bank to sell investment securities, raise new funds and to reduce its workforce by 40%.

Silvergate, which counted bankrupt cryptocurrency exchange FTX among its customers, provides banking services to digital asset companies, including a payment network for institutions called Silvergate Exchange Network, which has seen daily volumes of $1.3 billion in the fourth quarter.

Chief executive Alan Lane said the bank now had $4.6 billion in cash and near-cash, exceeding its customer deposit balance, after raising funds in the market and from banks federal government sponsored home loans. He attributed the withdrawal of deposits to a crisis of confidence in the crypto space.

The sale of securities saddles Silvergate with a loss of $718 million. It will also take a $196 million impairment charge to reflect the reduced value of the technology it had acquired to launch a blockchain-based payment product. Prior to the announcement, analysts expected Silvergate to make $124 million in profit in 2023, according to Refinitiv.

(Editing by Liam Proud and Sharon Lam)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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