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Silvergate warns of more losses, viability of its business after crypto crisis

A multistory building with the words Silvergate Bank on its front.
Silvergate Capital’s headquarters in La Jolla.
(Courtesy of Silvergate Capital)
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San Diego’s crypto-friendly Silvergate Bank has disclosed that its financial health has taken a turn for the worse amid continued troubles plaguing the digital currency industry — raising questions about its ability to remain a going concern.

Silvergate, which tailored its business toward providing deposit accounts, fund transfers, a real-time payments network and other banking infrastructure to the cryptocurrency industry, revealed that it has suffered additional losses in January and February from the sales of debt securities that backstopped its crypto-related deposits.

Those losses will put pressure on the FDIC-insured bank’s regulatory capital reserves and “could result in the company and the bank being less than well-capitalized,” Silvergate said in a filing with the U.S. Securities and Exchange Commission on Wednesday.

Under these conditions, Silvergate said it is evaluating “the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements. The company is currently in the process of reevaluating its businesses and strategies in light of the business and regulatory challenges it currently faces”

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Silvergate said that it probably would be unable to file its annual report with the SEC by the March 16 deadline as it works to answer questions related to regulatory and other “inquiries and investigations.”

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The bank’s independent accounting firm also needs more time to complete certain audit steps before filing the annual report, a Silvergate spokesman said in an email.

The disclosures sent the bank’s already beaten-down stock tumbling 58% to $5.72 a share Thursday. The stock is down from a high of $158 a share about a year ago during the crypto boom.

In the wake of the filing, some digital currency outfits took to Twitter seeking to reassure their customers that their funds were safe and to distance themselves from Silvergate. Coinbase posted that “in light of recent developments and out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate.” It is directing institutional client cash transactions to its other banking partners.

Paxos Trust posted that it has “no material exposure” to Silvergate and has discontinued all Silvergate Exhcange Network transfers and wires. Bitstamp also has temporarily stopped Silvergate wires and withdrawn the Silvergate Exchange Network, which allows institutional traders to transfer U.S. dollars between various crypto exchanges in real time, seven days a week.

Silvergate has been under increasing pressure amid a handful of high-profile bankruptcies in the crypto industry — punctuated by the collapse of FTX and criminal fraud charges against founder Sam Bankman-Fried.

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Both FTX and its sister firm Alameda Research had accounts at Silvergate. A group of U.S. senators led by Elizabeth Warren (D-Mass.) is looking into why Silvergate’s anti-money laundering and Bank Secrecy Act compliance programs failed to red flag improper transfers between FTX and Alameda.

In January, three top U.S. banking regulators — the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency — warned financial institutions of the high liquidity risks associated with crypto-asset deposits. The agencies pushed banks to perform “robust due diligence and ongoing monitoring” of crypto players with accounts at their banks.

“It confirms the fears that many regulators have had,” said Todd Baker, a senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy, in an interview with Bloomberg. “If this bank fails, it’s going to be held up as an example of why banks should be extremely conservative in dealing with crypto companies.”

In its SEC disclosure, Silvergate noted other head winds, including investigations from its banking regulators and the U.S. Department of Justice. It also faces at least three private lawsuits.

“While we are not surprised to see these risk factors given the recent inquiries by various regulatory bodies, this confirms that Silvergate is coming under significantly enhanced scrutiny in the wake of FTX’s bankruptcy,” Wedbush Securities analyst David Chiaverini wrote in a research note.

Following FTX’s collapse in November, Silvergate saw a run on its deposits, which dropped to $3.8 billion from $11.9 billion in the fourth quarter.

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The bank lost $1 billion in the fourth quarter because it was forced to sell debt securities intended to be held to maturity earlier than planned to cover deposit withdrawals. It also laid off 181 workers in San Diego to trim expenses — including its chief credit officer and chief anti-money laundering and sanctions officer.

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At year-end, Silvergate held short-term cash or equivalents of $4.6 billion, which exceeds the $3.8 billion in deposits remaining from crypto customers, according to the bank.

A large part of that cash came from $4.3 billion in short-term advances from the Federal Home Loan Bank of San Francisco. In Wednesday’s SEC filing, Silvergate said it had sold off additional investment securities to repay the FHLB loans in full.

At the end of the fourth quarter, Silvergate had debt securities valued at $5.6 billion available for sale. The value of that portfolio today is unclear. The bank could face valuation impairments to the portfolio in addition to the losses from earlier-than-expected sales to repay the FHLB.

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