Let’s take a closer look at Silvergate’s troubles and the consequences they may entail.

What is happening with Silvergate?

The bear market has taken its toll on many crypto companies, which found themselves in the need of cash and started to withdraw their money from the banks. This is particularly true about CeFi firms – traditionally managed finance companies that work with crypto, often on behalf of their clients (exchanges, hedge funds, crypto asset managers…) As clients withdraw their money from exchanges, the latter are forced to withdraw their deposits from their banks.

Crypto companies make the core of Silvergate’s client base (as per the end of Q3 2022, $12 billion of the total $13.2 billion of deposits were noninterest-bearing – the condition the bank applied to crypto firms).

Unsurprisingly, these deposits started to melt, with over $8 billion withdrawn in the last three months of 2022.

To cope with the withdrawals, the bank started to sell its debt securities (bonds, mortgage-backed securities, T-bills…), often at a loss.

Its Q4 2022 report registered a $1 billion loss.

Last week, Silvergate announced it was selling additional securities and expecting to record further losses, which would “negatively impact the regulatory capital ratios of the company… and could result in the company and the Bank being less than well-capitalized”.

It also discontinued its flagship payment network called “Silvergate Exchange Network,” or SEN for short. SEN, which was more akin to a database of accounts, allowed to transfer fiat 24/7/365 between the bank’s clients and played a crucial behind-the-scenes role in facilitating off-chain money transfers between big investors and crypto exchanges.

Major crypto companies that were working with Silvergate announced they would be halting the partnership: Coinbase, Galaxy Digital, Paxos, Kraken, Gemini, Bitstamp…

This Tuesday, Bloomberg reported that Federal Deposit Insurance Corporation officials were sent to the Silvergate headquarters to discuss ways to avoid a shutdown. This is the latest sign of urgency: deposits from the bank’s clients are insured by the government and the regulator could play a major role in resolving the problem. 

The markets are now waiting for Silvergate’s annual report, which has been postponed to March 16, notably to see whether the bank’s leverage ratio slid below the conventional 5%.

On a side note, US prosecutors in the DOJ’s fraud unit have been looking into Silvergate’s dealings with FTX and Alameda Research, but so far seem to have found no cause for concern.

Some consequences for crypto

Silvergate is a bank that is having bank problems, which, as many analysts believe, were caused by insufficient sectoral diversification and poor risk management.

However, the fact that Silvergate is one of the few crypto-friendly banks in the US, makes its case important for the whole crypto space. Bitcoin price losing 6% since the news broke is indicative of the markets bracing for potential consequences.

In the medium term, US banks are likely to be reducing their exposure to crypto clients, and some of them have already started. Signature, another bank with a crypto-friendly reputation, has announced it would be shedding as much as $10 billion in deposits from the crypto firms.

When possible, these firms would turn to overseas banks, like the Swiss Sygnum and SEBA, German Fidor, Luxembourgish Striga, Bahamian Deltec and Capital Union Bank, British Revolut… all known for their clear pro-crypto position.

It is highly likely that Silvergate’s failure will bring scrutiny from regulators who might impose drastic requirements on banks working with crypto firms.

In the longer term, however, the void left by the retracting banks could be filled with new banks, or – even more likely - traditional banks that can embark many crypto clients without threatening their diversification.

Written by D.Center