Governmental pressure on Silvergate Bank has put the cryptocurrency-focused company on precarious footing as it shuts down its flagship product for transferring dollars to and from digital assets.
On Friday, a banner appeared on the Silvergate home page announcing that it had made “a risk-based decision to discontinue the Silvergate Exchange Network.” The bank did not respond to an emailed request for more information, including whether the discontinuation is permanent, but Moody’s Investors Service said in a report that “the core franchise of Silvergate now is gone.”
The discontinuation news came one day after major cryptocurrency companies including the Coinbase exchange and stablecoin issuers Paxos and Circle, said they would stop using the transfer service. The Silvergate Exchange Network (SEN) was primarily used by cryptocurrency companies to help customers to fund their accounts with dollar-pegged stablecoins.
The company’s stock has tumbled about 69% this year, including 6% on Monday, leaving it at $5.40.
The Silvergate Exchange Network’s closure could be the result of an increasingly heavy hand by regulators, who seem to be engaging in a crackdown on U.S. cryptocurrencies. Last month, the Federal Reserve, FDIC and Office of the Comptroller of Currency issued a joint statement warning banks of liquidity risks posed from servicing digital asset firms and reminding them to apply existing risk management best practices.
“Certain sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows,” the statement reads.
Part of the service is the SEN leverage business, a series of secured loans collateralized by bitcoin. Risks to the unit are elevated by recent federal guidance on banks holding and lending against crypto assets and by regulatory reappraisals of such activity, which could lead to new negatives for Silvergate’s outlook, Moody’s said.
Silvergate’s situation is linked to the failure of FTX. After the crypto exchange’s collapse in November, the bank fell into hot water with legislators questioning how it failed to catch suspicious transactions between the exchange and its sister trading firm Alameda. Last week, FTX identified that $8.9 billion worth of customer funds were missing, largely due to loans made to Alameda. Silvergate held $1 billion in deposits from FTX at the time of the exchange’s collapse.
“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” Senators Elizabeth Warren (D-Mass.), Roger Marshall (R-Kan.) and John Kennedy (R-La.) wrote in an open letter to the bank in December.
As the FTX/Alameda collapse unraveled, Silvergate customers withdrew $8.1 billion of deposits. To help meet those demands, the bank took out $4.3 billion in loans from the Home Bank Loan system, a federal organization designed to provide banks with low-cost funding for mortgages, community lending and short-term liquidity. The use of the Home Bank Loan system as a functional lender of last resort caused uproar on Capitol Hill among lawmakers concerned that if Silvergate were to fail it would leave the Federal Deposit Insurance Corp. on the hook.
“That put additional regulatory pressure on Silvergate to pay back those borrowings, which means they had to actually sell the securities as opposed to just borrowing against them,” says Jared Shaw, senior equity research analyst at Wells Fargo. “This caused them to realize losses, accelerating the pressure on regulatory capital and on a shrinking balance sheet.”
The company’s Q3 report showed it held about $12 billion worth of bonds, most of which held unrealized losses that may have increased as U.S. interest rates rose. Were it able to hold the bonds to maturity, those losses would have been reduced, assuming the debt was retired at face value.
Last week, the bank filed a notice with the Securities and Exchange Commission that it would miss the deadline for submitting its 2022 Q4 and annual reports. Silvergate said that its unanticipated decision to sell investment securities in order to repay its loans from the Home Loan Bank would threaten the bank’s ability to meet capital ratios required by regulators. Silvergate revealed in January that it had realized an $886 million loss from selling securities in 2022 and that deposits fell to $3.8 billion at the end of the year from $11.9 billion in Q3. The Federal Home Loan Bank confirmed last week that Silvergate had fully repaid its loans, American Banker reported.
At the time, it reported a preliminary, unaudited net loss of $948.7 million for all of last year, compared with net income of $75.5 million for 2021.
The company’s filing last week said it needed more time to evaluate its controls over financial reporting and to “record journal entries related to subsequent events” that occurred after the books closed for last year. Ominously, it added that “a number of circumstances have occurred which will negatively impact the timing and the unaudited results previously reported.”