Silvergate Crash: Silvergate ‘Worst-Scenario’ Fuels Wider Crypto Concern

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Silvergate Capital Corp. has made one of the biggest bets in the US banking world on crypto. Now he is reeling from a run on deposits and a massive loss, intensifying fears that the collapse of crypto exchange FTX could seep elsewhere in the financial system. The worst-case scenario appears to have happened for Silvergate, Wells Fargo & Co. analyst Jared Shaw said in a note after the company’s announcement. Silvergate shares soared to a record 48%.

The staggering collapse of the Sam Bankman-Frieds FTX crypto empire, followed by his arrest in the Bahamas and extradition to the United States last month, is rippling through parts of the banking industry. While federal regulators said the financial system as a whole was largely unaffected, the collapse, marked by billions of dollars lost, prompted calls for watchdogs to prevent further calamity.

Bloomberg’s setbacks have baffled investors and caught the attention of US watchdogs over concerns that some banks are going too far too fast in digital assets. Silvergate said Thursday that its staff was shutting down and unplugging one of its crypto businesses. It happened the same week that three major US regulators warned lenders that uncontrolled risks cannot be allowed to infect the banking system and that agencies will take a slow stance in approving any new business. Based on the joint statement from regulators and the issues that have arisen with FTXs relationships, it is likely that all banks with crypto ties are going to face an increased level of scrutiny from review teams, Sultan Meghji, former Chief Innovation Officer of the Federal Deposit Insurance Corp., said in an interview. Whether or not this has been publicly announced, I think there is a serious push to completely separate crypto from the US banking system, Meghji said. Risk control The Federal Reserve, FDIC and Office of the Comptroller of the Currency weighed in earlier this week, saying it’s important to prevent risks that can’t be controlled from migrating into the banking system. Fed and OCC officials declined to comment on Silvergate, and an FDIC representative said the agency does not comment on open and functioning institutions.

Silvergates’ struggles serve as a cautionary tale for lenders looking to break into the digital asset industry as a new growth area. While most of the nation’s largest banks have avoided getting into the business, Bank of New York Mellon Corp. announced in October that it would launch a digital asset platform in the United States to allow select customers to hold and transfer Bitcoin and Ether. These custodial bank plans differ from the services offered by Silvergate as a custodial lender.

The volatility in crypto, which is reflected in Silvergates’ performance, will cause the rest of the banks to be more cautious about how to seek clarification from regulators, Wells Fargos Shaw said in an interview.

Silvergate shares fell after the bank said it laid off 40% of its staff and lost $718 million selling securities and related derivatives to cover customer withdrawals, which totaled $8.1 billion in digital asset deposits during the fourth quarter.

Digital Affirmation The company said it still believes in the digital asset industry and is committed to maintaining a highly liquid balance sheet with a strong capital position.

In response to the rapid changes in the digital asset industry during the fourth quarter, we took proportionate steps to ensure we maintained liquidity to meet potential deposit outflows, and we currently maintain a superior cash position. to our digital asset-linked deposits, Chief Executive Alan Lane said in a statement.

The CEO said on a conference call with analysts that Silvergate could even become a takeover target by a larger bank that wants to enter the crypto space.

I think being a sales candidate has always been a consideration, as we now find it difficult to manage such a concentrated business, and it has always made sense to be part of a larger and more diverse institution , said Mike Perito, analyst of KBW. in an email. In the short term, I imagine any sell-off would be tough, until the crypto backdrop is a bit cleaner.

Silvergate once saw the crypto industry as a huge growth opportunity. Over the course of a decade, it has transformed from a small business catering company into a publicly traded company known for providing banking services to major crypto clients such as Coinbase Global Inc. and Gemini Trust Co. as well than FTX and Alameda Research. The arrangement was going well, with Silvergate shares hitting an all-time high of $222.13 in late 2021 as digital asset prices set record highs. Then a painful crypto winter set in, with the value of virtual coins sinking, followed by FTX and its sister entities going bankrupt in November.

The thesis behind Silvergates crypto-focused payment platform, known as the Silvergate Exchange Network, is relatively simple: Crypto companies that might otherwise struggle to find a banking partner can put their money on the platform and send it to each other in exchange for digital assets. The Silvergates network only deals with US Dollars and Euros, and virtual currency transactions do not take place on the platform.

Deposits placed on the system pay no interest, giving Silvergate an almost free method of funding its business, and customer deposits in digital currency have ballooned during the heyday of cryptos. With the staggering collapse of the Bankman-Frieds empire, however, Silvergates’ big bet on crypto made it a target of short sellers and caught the attention of lawmakers, including Senator Elizabeth Warren.

Signature Bank, which said in December that it intended to remove up to $10 billion in digital asset customer deposits, is also suffering from the FTX meltdown. Shares of the company fell 4.6% to $112.54 on Thursday.

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