The collapse of Sam Bankman-Fried’s FTX led to a crisis at Silvergate, a US bank that offers cryptocurrency services. Bank’s clients have pulled more than $8.1bn of their crypto-linked deposits. Almost two-thirds of customer deposits were withdrawn in the last three months of 2022. This led to the company selling off assets at huge losses and laying off 40% of its workforce-around 200 people.
According to the Wall Street Journal report on Thursday, the crypto bank had to sell $5.2bn worth of debt securities and derivatives at a loss of $718mn to cover customer withdrawals of around $8.1bn. The amount is greater than the bank’s profit since 2013.
Silvergate Capital is a California-based crypto-friendly bank officially listed on the New York Stock Exchange (NYSE). However, it is regulated within the financial sector. In 2021, the crypto bank had digital asset customer deposits worth $11.9 billion, which declined to $3.8 billion at the end of 2022.
While Silvergate claimed it had $4.6 billion at the end of the fourth quarter of 2022 instead of $3.8 billion. The bank has $5.6 billion in debt securities that can be sold immediately.
CEO of Silvergate, Alan Lane, said:
“In response to the rapid changes in the digital asset industry during the fourth quarter, we took commensurate steps to ensure that we were maintaining cash liquidity in order to satisfy potential deposit outflows, and we currently maintain a cash position in excess of our digital asset related deposits.”
The withdrawals came after FTX’s bankruptcy because Silvergate held deposits for FTX units and Alameda Research, the cryptocurrency trading firm behind FTX. US lawmakers are also scrutinizing the bank.
“The digital asset industry has undergone a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies. These dynamics have sparked a crisis of confidence across the ecosystem and led many industry participants to shift to a ‘risk-off’ position across digital-asset trading platforms.”
Silvergate aims to maintain a “highly liquid balance sheet with a strong capital position,” the executive said. The conference call noted that Silvergate’s focus on crypto-assets could make it a takeover target for a big firm.
Silvergate Halted Stablecoin Launch
Silvergate found the cryptocurrency market as a source of growth opportunities. Before entering the cryptocurrency space in November 2019, it was a small US bank. It started providing services to leading crypto clients such as Gemini Trust, Coinbase Global, FTX, and Alameda Research. Its shares increased by more than 1,500% in 2021 due to the huge growth of digital currency.
The bank has dropped plans to launch its own digital currency (stablecoin). Bank acquired the technology and assets from Diem (formerly Libra), the stablecoin project from Meta Platforms. Now, the bank has suspended the plan to issue the stablecoin and written off $196 million related to the purchase of Diem’s technology from Facebook.
However, the bank stressed that crypto would be its main focus.
The bank said:
“While Silvergate is taking decisive action to navigate the current environment, its mission has not changed.”
US regulators have warned banks about the risks involved in cryptocurrencies. The agencies said they strengthened the supervision of banks interested in trading in digital assets.