Silvergate Capital (SI), once a crucial banking partner for the crypto firms, is now on the brink of failure.
The La Jolla, Calif.-based company announced Friday night that it is suspending its Silvergate Exchange Network (SEN), but “other deposit-related services remain operational.”
The announcement came about an hour after Moody’s downgraded Silvergate’s deposit rating from Ba3 to Caa1, a blow that places the bank’s liabilities at very high credit risk.
In November, Silvergate faced both financial losses and regulatory scrutiny, largely due to the collapse of major clients like FTX and associated hedge fund Alameda Research.
Silvergate’s shares, which plummeted Thursday and Friday, are down 95% over the past year.
On Thursday, Silvergate said it had to further delay its annual report and that the bank expected more losses beyond the nearly $1 billion fall in net losses it reported in January’s preliminary fourth-quarter results.
The bank also cited pending regulatory investigations, requests from lawmakers and its “ability to continue as a going concern for the twelve months following the release of these financial statements.”
Silvergate has faced a run on deposits from the crypto firms it maintains, including Coinbase, Paxos, Galaxy Digital, and others, who have struggled to distance themselves from the troubled bank.
What happens next?
In the worst case, Silvergate can file for bankruptcy.
More likely, the FDIC-insured bank could go bankrupt.
Similar to bankruptcy, receivership acts as an “umbrella” where an “executor” or trustee is appointed to take over the business with the ultimate goal of protecting creditors – particularly those with secured loans.
Unlike bankruptcy, receivership is not a legal measure and aims to protect a company’s lenders rather than borrowers (as is the case with bankruptcy).
Jesse Austin, a former partner in King & Spaulding’s bankruptcy practice, explained that receivership decisions and enforcement are made by two federal banking regulators, the US Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
The story goes on
“If the comptroller finds Silvergate undercapitalized, they will refer them to the FDIC, and the FDIC will step in and close the bank,” Austin told Yahoo Finance.
Although the bankruptcy law specifically prevents a bank from filing for Chapter 11 or Chapter 7 bankruptcy, Austin said Silvergate’s holding company could still file for bankruptcy — especially if it has other valuable assets besides customer deposits.
Along with Silvergate’s SEN network, the company also owns stablecoin assets that were acquired by Meta’s closed-end stablecoin project Diem in January last year for 1.2 million shares and $50 million in cash.
The crypto-friendly bank’s troubles follow joint statements in January and February issued by the Federal Reserve with the FDIC and OCC, which warned of the volatility risks of banks accepting crypto customers.
Given Silvergate’s position, the statements raise further questions about whether U.S. banks will become “much gun-shy” about the digital asset industry and restrict access for crypto firms, according to a banking industry source familiar with Silvergate’s capitalization .
“On the one hand, when crypto is going to be out there and Americans are going to put their dollars in it, don’t you really want those dollars to be held in the US instead of in foreign banks?” This person, who asked for anonymity, released via Silvergate to be able to speak, Yahoo Finance announced. “Maybe it’s not that as a bank you can’t take these types of deposits, but you have to limit them proportionally on your balance sheet.”
How Silvergate Reached the Abyss
Silvergate became a regional bank in 1996, but it wasn’t until 2014 that CEO Alan Lane decided the company should start serving crypto clients like the now-bankrupt Genesis.
The company has carved a niche for itself by providing banking access to a growing number of crypto startups, and the bank’s offerings have evolved into a formalized payments platform known as the Silvergate Exchange Network, on which crypto operates 24/7 -Depositors making US dollar transfers can borrow outside of normal bank opening hours.
Silvergate had a total of $1.8 billion in deposits and $2 billion in assets at the end of the fourth quarter of 2018. By the time crypto peaked in 2021, total deposits and assets had grown to $14.3 billion and $16 billion, respectively.
Silvergate’s logo displayed on a phone screen and depiction of cryptocurrencies can be seen in this illustrative photo taken on January 29, 2023 in Krakow, Poland. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Following the bankruptcy of crypto exchange FTX, Silvergate’s total deposits and assets dropped to $6.2 billion and $11.3 billion by the end of the fourth quarter of last year.
With that drop in deposits, Silvergate’s capital shrank by half relative to its assets. That leverage ratio fell to 5.3% from 10.7% in the third quarter, a level that is of particular concern to banks because regulators have reason to intervene for any US bank below 5%.
“The difficulty here is that Silvergate wasn’t a huge bank,” the banking industry source told Yahoo Finance. “They have strategically grown their deposits by partnering with crypto companies, but their crypto deposits have grown much larger than the rest of their business.”
David is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers
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