The main crypto bank could be liquidated: Silvergate Capital

Major Crypto Bank Dismantled: Silvergate

The shares of the bank specialized in cryptocurrency transactions Silvergate Capital (SI.US) and listed on the New York Stock Exchange (NYSE), have fallen more than 63% in a week.

The contagion effect of the insolvency of other entities ended up affecting this company and the situation seems to be far from over, since the Silvergate bank, focused on the financial business of cryptocurrencies, faces new suspicions of insolvency that have dampened February crypto market rally.

What do we know so far?

Silvergate is known as the main payment channel for cryptocurrencies, connecting the cryptocurrency industry with the traditional banking system. An intermediary that takes advantage of the best of both worlds.

Named “crypto” companies have used Silvergate to process crypto-related transactions. However, the bank has suffered from the flight of most of its clients and its deposits are at a minimum. Specifically, cryptocurrency-related deposits fell 68% in the last quarter of 2022.

The main cryptocurrency platforms have spoken about it. Coinbase said it has stopped "accepting or initiating payments in light of recent Silvergate developments." Paxos has also stopped processing transactions through Silvergate. Other cryptocurrency firms that have severed ties with Silvergate include Circle, Bitstamp, Crypto.com, Gemini, and Galaxy.

Silvergate's problems began at the end of 2022, after the bankruptcy of FTX and the economic hole it left open in the crypto industry. Problems recently worsened when Silvergate warned to the US Securities and Exchange Commission (SEC) that its 10-K report, the required legal document showing a company's financial and business status, would be delayed.

The publication of this delay in the filing of the 10-K exposes immediate problems about the financial state of the reference bank of cryptocurrencies. The bank, in its filing with the SEC, expressed concern about the bank's ability to continue business smoothly in the coming months.

It was in January that Silvergate reported a net loss, attributable to common stockholders, of nearly $1 billion for the fourth quarter of 2022. To keep up with customer withdrawals, Silvergate paid off its balance sheet debt ( debt securities sold), resulting in a loss of value of $718 million. Insinuating that these losses could reflect a state of decapitalization by the entity.

The bank processed more than $8 billion worth of customer withdrawals in the fourth quarter of 2022, resulting in a temporary bank “corralito”. To do this, it received advances of $4.8 billion from the Federal Home Loan Bank in the fourth quarter of 2022 to manage that situation.

To stay afloat, the bank had to take drastic measures, including laying off approximately 40% of its staff and shutting down the Silvergate Exchange Network (SEN), its proprietary 24-hour payment network.

“As Silvergate prepares for what it expects to be a sustained period of lower deposits, it is taking several steps to help ensure the business is resilient, including managing its expense base and evaluating its product portfolio. and customer relationships in the future. Additionally, Silvergate has made the difficult decision to substantially reduce its workforce to account for the economic realities facing its business and the digital asset industry today,” the report published in January stated. Source: Silvergate

Under the microscope of the authorities

The series of negative events related to cryptocurrencies that occurred in 2022 has drawn the attention of financial and government authorities. In the US, the SEC has continued to scrutinize crypto companies. In December, a group of US senators asked Silvergate to provide full records of the FTX transactions it processed. Senators requested clarity on the ties between FTX and Silvergate.

Alan Lane, CEO of Silvergate, stated that FTX deposits accounted for less than 10% of the total deposits of all Silvergate digital asset clients, allaying fears of a potential Silvergate insolvency.

Silvergate still faces a large number of inquiries from US authorities, including the fraud unit of the US Department of Justice (DoJ). The Justice Department opened a fraud investigation earlier this year to investigate Silvergate's dealings with the FTX platform of Sam Bankman-Fried and its trading arm Alameda Research.

The White House is aware

During a recent press conference at the White House, White House press secretary Karine Jean-Pierre said that the Biden administration is aware of the Silvergate situation, and that it is also monitoring the situation of the specialized cryptocurrency bank, "comparing it with those of other cryptocurrency companies," said Jean-Pierre.

Karine Jean-Pierre pointed to recent guidelines that US banking regulators have issued on how banks can protect themselves from cryptocurrency-related risks.

“In recent weeks, banking regulators have released guidelines on how banks should protect themselves from the risks associated with cryptocurrencies,” she said. “As you know, this is a president who has repeatedly called on Congress to take action to protect Americans from the risk posed by digital assets, and he will continue to do so,” Jean-Pierre added.

The press secretary declined to comment further or give specific details about the Silvergate situation.

Conclusions

From XTB we believe that the recent delay in the presentation of the annual 10-K report was the trigger for a flight movement and the generation of negative sentiment in the crypto investor community and among investors who own Silvergate shares.

However, while the bank is under investigation by regulatory agencies, Silvergate has not yet been accused of wrongdoing and for now, the main concern is its ability to continue running smoothly.

If Silvergate ultimately becomes insolvent, the effects will be drastic in the cryptocurrency space, but only temporarily. We already know how resilient certain blockchains and the general crypto community are and there will always be a new entity emerging from the ashes of its predecessors and alternative payment channels will be found.

Dario Garcia, EFA
XTB Spain