Silvergate Capital is running out of customers as quickly as it’s running out of time and money, and that’s likely to leave the already beaten-down crypto industry in the U.S. with few places to turn for banking partners.
The crypto-friendly bank has seen a who’s who of the industry peel away on Thursday, a day after it warned in a regulatory filing that it may be “less than well-capitalized” and said it was "re-evaluating its business.” Shares plummeted about 50% and partners came out in quick succession to say they were moving to other alternatives.
Coinbase, Circle, Paxos and Gemini were among several companies to publicly say they were severing ties with the bank on some level, while people familiar said market-making and over-the-counter trading firms GSR, Wintermute, and Blockchain.com have ditched its Silvergate Exchange Network. SEN allows Silvergate clients to send U.S. dollars and euros 24 hours a day. The network had been a key driver of growth for the bank, last year handling over $560 billion in volume, according to The Block's data.
“Pretty much all the liquidity is gone from SEN and has moved to other safer banks,” a source close to a counterparty said, adding that “we do need more options.”
"Silvergate is working diligently to file its 10-K as soon as possible and has no further comment at this time," a bank spokesperson told The Block.
'We will adapt'
And options are in short supply. Signature Bank, which picked up Coinbase Prime users in today’s shuffle, is now one of the leading banking partners left in the space, but is working to scale back its crypto dealings. Cross River Bank in the U.S. and offshore options like Deltec still remain.
“Short-term it’s going to be a shock but it shouldn’t be at the scale as the same events we experienced last year,” said Laura Vidiella, vice president of business development and strategy at digital asset investment firm LedgerPrime. “Mid- to long-term we will adapt to whatever the new circumstances are.”
Other institutions may yet step up, but the current regulatory environment may make that unlikely considering Silvergate’s current predicament.
The La Jolla, California-based bank, which reported a $1 billion loss in the fourth quarter, has received its share of regulatory and political scrutiny because of its ties to the digital asset industry, especially FTX and Alameda Research. Wednesday's filing to the SEC confirmed an investigation by the Justice Department into the bank, as well as bank regulator and congressional inquiries, and cited “safety and soundness concerns” for business models “that are concentrated in digital asset related activities.”
Crypto bank, mortgage loan
Silvergate had to take a $4.3 billion advance loan from the Federal Home Loan Bank of San Francisco in the fourth quarter, but shuttered its wholesale mortgage lending business weeks later.
That use of a congressionally mandated system aimed at keeping access to home loans stable raised concerns on Capitol Hill. It prompted a bipartisan group of senators to blast Silvergate CEO Alan Lane for “evasive” responses to a previous letter and demand more information about the FHLB advance.
The senators said that if Silvergate were to fail, "as have banks facing a fraction of the withdrawal rates Silvergate has faced – FHLB could ‘assert statutory lien priority on other assets – essentially putting the Home Loan bank ahead of all other creditors,’ including the Federal Deposit Insurance Company’s (FDIC) deposit insurance fund."
That could lead to a scenario where taxpayer money bails out Silvergate depositors.
An FDIC spokesperson declined to comment on the situation, citing agency policy to not comment on “open and operating institutions.”
With Silvergate’s fate very much up in the air, the crypto industry is left to look around for alternatives. For some longtime digital asset participants, the worst case scenario will set the market back a decade. Transactions will settle via wire and be slow moving, while retail investors could find it extremely different as firms like Signature look to move away from this type of business.
The bad old days
“We're going back to 2014, everyone will have small regional mid-tier banks until they get uncomfortable with the KYC burden, then you switch to another bank,” Dan Matuszewski, who previously ran Circle's over the counter trading desk and now runs a hedge fund, told The Block. “There could be a world — potentially — where there's no card business for exchanges. Stablecoins are good and help once you're in it. But moving money in and out will be hard.”
LedgerPrime's Vidiella, on the other hand, told The Block she sees a possible silver lining.
"It’s to be seen how the story develops," she said. "But from there we could finally see more guidelines around regulation for on-ramp and off-ramp transactions as well as the relationship between traditional banks and exchanges."
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