Silvergate Capital (SI), once a crucial banking partner for crypto companies, is now on the brink of failure.
The La Jolla, California-based company said late Friday that it will suspend its Silvergate Exchange Network (SEN), but that “other deposit-related services remain operational.”
The announcement came about an hour after Moody’s downgraded Silvergate’s bank deposit rating to Caa1 from Ba3, a blow that views the bank’s liabilities as subject to very high credit risk.
In November, Silvergate faced financial losses and regulatory investigations largely due to the collapse of major clients such as FTX and related hedge fund Alameda Research.
Silvergate shares, which plunged on Thursday and Friday, are down 95% over the past year.
On Thursday, the California state-chartered bank said it needed to further delay its annual report and that it anticipated more losses beyond a nearly $1 billion drop in net loss it reported in January preliminary results for the fourth quarter.
The bank also cited pending regulatory investigations, inquiries from lawmakers and its “ability to continue as a going concern for twelve months after the issuance of these financial statements.”
Silvergate faced a run on deposits from the crypto companies it banked, including Coinbase, Paxos, Galaxy Digital and others, which made an effort to distance themselves from the troubled bank.
What happens next?
In the worst case, Silvergate may file for bankruptcy.
Most likely, the FDIC-insured bank, Silvergate Bank, will go into receivership.
Like bankruptcy, receivership acts as a “protective umbrella” in which a “trustee” or trustee is appointed to take over the business with the ultimate goal of protecting creditors, especially those with secured loans.
Unlike bankruptcy, receivership is not a legal action and is intended to protect a business’s lenders rather than the borrowers (as is the case with bankruptcy).
Jesse Austin, a former partner in the bankruptcy practice of King & Spaulding, explained that in this case the decision and execution of the receivership will be made by two banking regulators: the Federal Deposit Insurance Corporation (FDIC) or the Department of Protection and Innovation. California Financial Institution (DFPI). ) – which could declare Silvergate Bank insufficiently capitalized.
“If the California baking regulator or the FDIC finds that Silvergate is undercapitalized, the FDIC will step in and close the bank,” Austin told Yahoo Finance.
Although the bankruptcy code specifically prevents a bank from filing for Chapter 11 or Chapter 7 bankruptcy, Austin said Silvergate’s holding company, Silvergate Capital, could still file for bankruptcy, especially if it has valuable assets other than deposits. the clients.
Along with Silvergate’s SEN network, the company also holds stablecoin assets purchased from Meta’s gated stablecoin project Diem in January last year for 1.2 million shares and $50 million in cash.
The crypto-friendly bank’s troubles follow January and February joint statements issued by the Federal Reserve with the FDIC and OCC that warned of volatility risks assumed by banks serving crypto clients.
In light of Silvergate’s position, the remarks raise further questions about whether US banks will become “much more timid” about the digital asset industry, restricting access for crypto firms, according to a banking industry source familiar with with the capitalization of Silvergate.
“For one thing, if cryptocurrency is going to be available and Americans are putting their dollars into it, don’t you really want those dollars to be kept in the US rather than in foreign banks?” this person, who requested anonymity to speak freely about Silvergate, told Yahoo Finance. “Maybe it’s not that if you’re a bank you can’t accept those types of deposits, but you should limit them proportionately on your balance sheet.”
How Silvergate got to the brink
Silvergate became a regional bank in 1996, but it wasn’t until 2014 that CEO Alan Lane tapped the firm to start serving crypto clients like the now-bankrupt Genesis.
The firm carved a niche for itself by providing banking access to an increasing number of crypto startups, and the bank’s offerings evolved into a formalized payments platform known as the Silvergate Exchange Network, where crypto depositors operating 24 hours a day , 7 days a week, could make US dollar transfers and loans outside of traditional banking hours.
Silvergate had $1.8 billion in total deposits and $2 billion in assets at the end of its fourth quarter of 2018. By the cryptocurrency peak in 2021, its deposits and total assets had risen to $14.3 billion and $16 billion, respectively.
Following the bankruptcy of crypto exchange FTX, Silvergate’s total deposits and assets fell to $6.2bn and $11.3bn at the end of the fourth quarter of last year.
With that drop in deposits, Silvergate’s capital relative to its assets was cut in half. This leverage ratio fell from 10.7% in its third quarter to 5.3%, a level of specific concern for banks, as regulators have reason to intervene in any US bank below 5%.
“The difficulty here is that Silvergate was not a big bank,” the banking industry source told Yahoo Finance. “They strategically increased their deposits by working with crypto companies, but their crypto deposits became much larger than the rest of their business.”
David is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers
Click here for the latest crypto news, updates, values, prices and more related to Bitcoin, Ethereum, Dogecoin, DeFi and NFTs.
Read the latest financial and business news from Yahoo Finance