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Silvergate Bank headquarters in La Jolla, Calif. The company is a major player in crypto banking.
Ariana Drehsler/Bloomberg
Silvergate Capital
is in crisis mode after the crypto bank warned about its ability to “continue as a going concern.” The disclosure, made in a securities filing late Wednesday, sent its stock crashing 55% on Thursday to around $6 a share.
The disclosure also raised questions about the future of crypto companies’ relationships with banks; liquidity in the token market; and whether anyone could step into
Silvergate
‘s (ticker: SI) shoes if the company doesn’t survive its latest crisis of confidence.
Silvergate rattled the market with a disclosure to the Securities and Exchange Commission that it would miss a deadline to submit its 10-K annual report. In addition to warning about its ability to continue operating, the company said it was “re-evaluating its businesses and strategies in light of the business and regulatory challenges it currently faces.”
A Silvergate spokesperson said the firm “is working diligently to file its 10-K as soon as possible.”
La Jolla, Calif.-based Silvergate was founded in the late 1980s, but it didn’t see rapid growth until 2013, when executives started to court business from the cryptocurrency industry. Digital-assets firms had found it difficult to get banking services. Silvergate swooped in and rapidly grew deposits from crypto companies as prices of Bitcoin and other tokens soared. Silvergate said it had $14.3 billion in deposits at the end of 2021.
The firm also created the “Silvergate Exchange Network” (SEN) to handle transfers of traditional currency between its customers. In the fourth quarter of 2021, the network handled $219.2 billion in U.S. dollar transfers. At the end of that year, its customers included 94 crypto exchanges and 894 institutional investors. The firm also made U.S. dollar loans to customers who posted Bitcoin as collateral.
The SEN network allowed crypto companies to avoid ACH transfers, which can take several business days to complete. Silvergate said the network operated 24 hours a day, year-round, with “near real-time transfers and immediate availability of funds.”
As concerns about Silvergate’s health spread on Thursday, major firms announced they would pull out of SEN. Circle internet Financial, which issues the dollar-backed USDC stablecoin, on Twitter said it was “unwinding certain services” with Silvergate.
Coinbase Global
(COIN) said it would no longer accept or initiate payments to or from Silvergate. Stablecoin company Paxos said it had discontinued SEN transfers to its Silvergate account but would still process outgoing transactions.
Silvergate has also experienced a run on deposits, which dropped by $8.1 billion in the fourth quarter to $3.8 billion, wiping out seven years of profits at the company.
The concern now is a possible extinction of SEN , which could have broad ramifications for liquidity in the token market, says Ava Labs President John Wu, whose firm helped build the Avalanche blockchain.
Wu said that his company, as well as nearly every other crypto firm and institutional investor, has accounts at Silvergate and that SEN made it much easier and faster to transfer money between investors, exchanges and market makers.
“We’re losing the few rails we have” to transfer traditional money, Wu says. “If Silvergate goes out of business, it’s going to push funds and market makers further offshore.”
Wu said that “slippage” on crypto trades, or the difference between the price at which a trade is expected to happen and where it actually executes, had already worsened over the past few months as market makers such as Genesis Global pulled back from the market. The disappearance of Silvergate’s network would make liquidity worse, he said.
Some financial institutions that have courted crypto clients, such as
Signature Bank
(SBNY), which runs a network similar to SEN, have announced that they’re diversifying away from the industry. That leaves little likelihood that another bank could fill Silvergate’s shoes in the near-term.
Regulators, for their part, may also view the crisis at Silvergate as another reason to keep crypto out of the banking system. Federal regulators have issued guidance lately, warning banks of the risks associated with crypto activities, even as they say banks aren’t prohibited from doing crypto business. Top regulators including the Federal Reserve in January issued a joint statement that they were “carefully reviewing any proposals from banking organizations to engage in activities that involve crypto-assets.”
The potential failure of Silvergate would intensify the scrutiny, says Todd Phillips, who runs Phillips Policy Consulting and was a senior attorney for the Federal Deposit Insurance Corp.
“If Silvergate Bank failed, regulators would spend a lot more time investigating how risky these types of crypto activities really are,” says Phillips. “If it’s more costly for banks to accommodate one industry than another, that’s just economics. Banks are going to have to make a decision about whether they want to bank this type of industry.”
Write to Joe Light at joe.light@barrons.com
