Coinbase ends relationship with crypto bank Silvergate

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For years, California-based Silvergate Bank has served as the financial backbone of the crypto industry, with traditional institutions staying away from the volatile sector.

After severe losses suffered from the collapse of FTX and the broader bear market, Silvergates crypto betting may be coming to an end as the bank loses key clients and faces federal investigations.

On Wednesday, Silvergate submitted a notice to the U.S. Securities and Exchange Commission saying it would not be able to file its annual report on time, citing regulatory and financial uncertainty. Shares opened Thursday down more than 45%.

The company is assessing the impact these subsequent events have on its ability to continue operating, Silvergate wrote in the filing, adding that it is reassessing its operations and strategies.

It comes less than two months after the bank announced a net loss of $1 billion for the fourth quarter of 2022, even as CEO Alan Lane insisted the company’s mission has not exchange.

Silvergate was founded in 1988 as a savings and loan association, but shifted to serving the digital asset industry as crypto grew in popularity. The move was lucrative during the crypto bull market, as Silvergates stock price rose over 1,500% between November 2019 and November 2021.

Crypto has come to dominate its business. In September 2022, 90% of its deposit base came from crypto companies. As of mid-January, Silvergate was serving over 1,500 digital currency and fintech companies.

One of its main clients was FTX, whose collapse in November sent shockwaves through the Silvergates ecosystem and business model. The bank has drawn criticism from lawmakers, including Sen. Elizabeth Warren (D-Mass.), who wrote a letter in December along with two other senators seeking information about Silvergate’s relationship with Sam Bankman-Frieds’ fallen empire. .

Even though Silvergate suffered massive losses and its share price fell precipitously, Lane maintained that Silvergate would continue down the crypto path. Its filing with the SEC on Wednesday appears to change that direction.

Silvergate announced that it sold investment and debt securities in January and February 2023 to repay a controversial $4.3 billion loan late last year from the Federal Home Loan Bank of San Francisco. , causing consternation among senators, and revealed that he was under investigation by banking regulators and the United States. Department of Justice.

On Thursday morning, Coinbase announced that it would no longer accept or initiate payments to or from Silvergate, adding that it had minimal or no significant business exposure to Silvergate. Coinbase cited recent developments and an abundance of caution for the decision.

At Coinbase, all customer funds continue to be safe, accessible, and available.

In light of recent developments and out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate.

Coinbase (@coinbase) March 2, 2023

As a matter of principle, Silvergate cannot comment on specific customers or their business activities, said Evann Berry, a Silvergate spokesperson from public relations firm Edelman Smithfield.

Other crypto firms that work with Silvergate have also distanced themselves from the company. In a statement shared with Fortune, a Paxos spokesperson said: Paxos has no material exposure to Silvergate. Paxos’ priority has always been the protection of its clients’ funds and assets and as such we leverage a diverse network of banking partners. The spokesperson added that Paxos had halted transfers with Silvergates SEN, or exchange network, as well as transfers to its Silvergate account. Paxos will continue to process outgoing payments.

As Silvergate questions its future viability, the crypto industry is on the verge of losing a crucial financial partner. Adam Cochran, partner at venture capital firm CEHV, tweeted that Silvergate was key to crypto exchanges and market makers.

The Silvergates death spiral is going to be tough for the crypto, he said.

Coinbase has announced it will switch to Signature, another cryptocurrency-enabled bank, although it also faces financial uncertainty, with Q4 2022 deposits down 13.8%, largely thanks to its planned reduction of digital asset partners.

On Wednesday, Bloomberg reported that crypto exchange Kraken would withdraw from Signature for certain financial transactions due to new guidelines from the bank that it would no longer support crypto exchange customers buying and selling amounts below 100. $000.

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