Three months after the FTX debacle shook the entire industry to its core, Silvergate Capital, a partner of the collapsed crypto exchange is now in hot waters. On Thursday, prominent crypto firms, including Coinbase, Paxos, Galaxy Digital, and Crypto.com, announced they no longer accept or initiate payments through Silvergate after revealing that the crypto bank was facing difficulties in continuing operations.
Silvergate Capital, which started as a savings and loan association in 1988, re-capitalized into a bank in 1996. In 2013, the California-based fintech became one of the first financial institutions to provide a banking infrastructure for crypto companies.
The bank insured by the Federal Deposit Insurance Corporation (FDIC) also operates a payment settlement system called the Silvergate Exchange Network (SEN), used by all significant crypto companies to exchange fiat currencies and conduct payments in real-time. Last year, SEN processed $563.3 billion worth of U.S. dollar transfers for its 1,620 clients, including crypto firms and institutional investors.
Things Started To Go Down The Hill For Silvergate In November
Things started to unravel for Silvergate in November after the bankruptcy of FTX triggered a bank run on its platform. Sam Bankman-Fried, the disgraced former billionaire founder of FTX, had about $1 billion deposited in the bank through his various companies.
Panicked customers started withdrawing funds from their Silvergate accounts, forcing the fintech to sell off its assets at a loss to cover the $8.1 billion in withdrawals. By liquidating its debt, Silvergate incurred a loss of $718 million, far exceeding its total profits since 2013. The bank also borrowed billions against its assets to prevent a liquidity crisis or possible insolvency.
According to the bank’s Q4 2022 financial report, it had $4.6 billion as cash-in-hand, $3.8 billion remaining in deposits, and another $5.6 billion in debt securities like U.S Treasurys that can be liquidated anytime. However, customer deposits declined by a staggering 68% since November, jeopardizing the bank’s operations. In January, Silveragate laid off around 200 employees, or 40% of its workforce, and shut down its $200 million stablecoin project to which it had purchased rights from Meta (formerly Facebook) to use the technology from their discontinued Diem cryptocurrency project.
Silvergate’s Relationship With Financial Fraud And Ex-Billionaire Sam Bankman-Fried
Silvergate came under regulatory scrutiny for its business relationship with FTX and Alameda Research. Both FTX and Alameda are companies founded by Bankman-Fried. While FTX was the face, Alameda acted as its hedge fund, market maker, and trading platform.
The exchange faced a liquidity crisis in November after it siphoned customers’ crypto assets to sister firm Alameda to fund speculative investments. Bankman-Fried and his partners, FTX COO Gary Wang and Alameda Research CEO Caroline Elisson, reportedly mismanaged $10 billion in customer funds.
Further investigations into FTX found that the company held no bank account to facilitate direct deposits by customers. Users that wish to trade on the exchange would instead transfer their funds to a Silvergate account opened by Alameda Research in 2018. The United States Department of Justice (DoJ) is now looking into the various Silvergate accounts linked to Sam Bankman-Fried’s companies. Federal prosecutors are also investigating whether the bank knew the situation that unravelled at FTX.
In its latest filing with the U.S. Securities and Exchange Commission (SEC), Silvergate disclosed that it continued to suffer heavy losses after selling debt securities in January and February to keep operations running. The bank claims that these losses would put more pressure on its capital reserve ratios, which could result in the firm being “less than well-capitalized.” Silvergate also said it will be unable to file the annual 10-K report with the SEC before the March 16 deadline as it was in the process of “reevaluating its businesses and strategies.”
Major Crypto Firms Declared That They Have Terminated Partnership With Silvergate
Following the revelations, major crypto firms like Coinbase, Crypto.com, Gemini, Bitstamp, Paxos, Galaxy Digital, Cboe Clear Digital, Circle, and Cumberland announced that they no longer accept or initiate payments through Silvergate and have terminated their partnership with the bank.
U.S.-based crypto exchange Coinbase Global will no longer use the Silvergate Exchange Network (SEN) for fund transfers and instead work with its other banking partners to facilitate customer cash transactions. Bitstamp asked users to fund their accounts on its exchange through Signature Bank’s SigNet platform while warning customers that transfers made via SEN may get lost as it can’t ensure whether the accounts will be credited.
Galaxy Digital stated it had no exposure to the troubled bank and has taken “vigorous” action to ensure that client and firm assets are safe as part of its risk-management process. Stablecoin issuer Paxos Trust Co. discontinued all transactions and wire transfers via SEN to its Silvergate accounts. However, the company will continue to process all outgoing client payments from Silvergate.
Circle, the issuer of USD Coin (USDC), said it is winding down its services with the crypto bank. Cumberland, the crypto division of trading firm DRW, said it had minimal exposure to Silvergate over the last few months. The Chicago-based trading giant is diversifying its banking partnerships because of risk-management policies.
Silvergate shares, which fell by 88% following the collapse of FTX, plummetted 58% on Thursday afternoon. As the exodus continues and the bank procures more losses, analysts warn investors to get out of Silvergate as soon as possible.