A Crypto-Friendly Bank Finds Itself On The Brink

Silvergate bank is in some deep water

Gates on Fire

Silvergate, a crypto-focused bank based in California, has recently faced significant challenges due to the collapse of digital token prices and the implosion of Sam Bankman-Fried’s FTX empire, which was a banking client. In a regulatory filing on Wednesday, the bank stated that it would not be able to file its annual report with the Securities and Exchange Commission on time, and it was evaluating its ability to survive as a going concern.

The bank’s capital position has further weakened since it reported dismal fourth-quarter earnings, and it is now evaluating the impact of subsequent events on its ability to continue as a going concern for the 12 months following the issuance of its financial statements.

Cutting Ties

Many companies have cut ties with the bank due to concerns over its compliance with anti-money laundering regulations and its relationship with cryptocurrency exchanges.

Silvergate Bank is known for its focus on serving clients in the cryptocurrency industry. While this has been a lucrative market for the bank, it has also led to increased scrutiny from regulators. In 2020, Silvergate was fined $1.25 million by the Financial Crimes Enforcement Network (FinCEN) for deficiencies in its anti-money laundering program. This penalty highlighted concerns that the bank may not be adequately monitoring its clients for suspicious activity.

In addition to these compliance concerns, there have also been reports of Silvergate’s close relationships with cryptocurrency exchanges that have been accused of facilitating illegal activity, such as FTX. This has raised further concerns among regulators and other financial institutions about the bank’s risk exposure.

As a result, some companies may be cutting ties with Silvergate in order to avoid any potential regulatory or reputational risks associated with doing business with the bank. Other financial institutions may also be taking a closer look at their own relationships with Silvergate in light of these concerns.

Coinbase, a US-listed crypto exchange, has announced that it will no longer accept or initiate payments to or from Silvergate. The exchange stated that it had “di minimis corporate exposure” to the bank, and institutional client cash transactions would be facilitated through other banking partners. Galaxy Digital, a crypto financial services company, has also announced that it has stopped accepting or initiating transfers to Silvergate, adding that it had “no material exposure” to the bank.

A Drop in Shares and more woes

The bank’s shares closed 58% lower in New York on Thursday, and its capital ratios are expected to suffer from fresh losses on its securities portfolio, which amounted to $5.7bn at the end of 2022. The bank has been selling off securities in an effort to meet withdrawals from crypto customers amid what it has described as a “crisis of confidence” in the sector.

The warning marks a precipitous fall for the once small community bank that supercharged its growth by pushing into cryptocurrencies. Many of the world’s top crypto miners, exchanges, and custodians used Silvergate to deposit and transfer billions of dollars. The bank’s share price rose to a high of $219.75 in November 2021 but closed at $13.53 on Wednesday.

When depositors began pulling money out of Silvergate following the collapse of the cryptocurrency exchange FTX, the bank shored up its liquidity by tapping a quasi-government agency not typically known as a lender of last resort. Silvergate received $4.3 billion from the Federal Home Loan Bank of San Francisco late last year, according to company filings. The billions in liquidity provided by the FHLB in the fourth quarter alone helped La Jolla, Calif.-based Silvergate stave off a further run on deposits. The crypto-friendly bank now holds roughly $4.6 billion in cash, the bulk of which came from Home Loan Bank advances, according to select financial metrics that Silvergate released last week.

However, the lifeline that Silvergate received from the Home Loan Bank System has raised questions about the hybrid public-private business model of the Home Loan banks and whether they are engaged in the primary mission of supporting housing. Critics have suggested that the funding to Silvergate is an example of mission creep.

Silvergate’s recent challenges and the many companies cutting ties with the bank have had a significant impact on the bank’s capital position and its ability to continue as a going concern. The bank’s shares have plummeted, and it has been forced to sell off securities to meet withdrawals from crypto customers. The bank’s relationship with the Federal Home Loan Bank of San Francisco has also raised questions about the Home Loan banks’ primary mission and their involvement in the crypto industry. It remains to be seen how the bank will respond to these challenges and whether it will be able to regain the trust of its customers and investors.

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