Silvergate Capital Corporation, a US bank specializing in cryptocurrencies, has announced that it will cease operations and voluntarily liquidate. The decision follows devastating losses related to the FTX debacle.
Last week, Silvergate had warned that it was reviewing its ability to do business. The reason was additional losses from the sale of debt securities. Further defaults would leave the bank "less than well capitalized." The now official cessation of operations and voluntary liquidation represents another blow to the crypto industry. Silvergate was a major player for the industry, providing banking services to various crypto exchanges and companies.
No future for Silvergate
According to a statement from the crypto bank, the decision to close was deemed the best way forward. The resolution and liquidation plan calls for a full repayment of deposits to ensure that customers' interests are protected. Several of the bank's partners, including well-known companies such as Coinbase and Galaxy Digital, had already parted ways with Silvergate last week. The Silvergate Exchange Network (SEN) was also discontinued a few days ago.
This is another classic case of asset-liability mismatch. Shortly after the relationship between Silvergate and FTX/Alameda became public, customer deposits, along with a decline in asset values, plummeted from nearly $12 billion to $3.8 billion in a single quarter. Because Silvergate simply did not have the liquidity it needed, the bank had to sell collateral for a loss in the high triple-digit millions and lay off 40% of its workforce. This was followed by another wave of securities losses in January.
"The problems Silvergate is facing were primarily the result of inadequate risk management - particularly due to over-reliance on volatile short-term deposits while making loans or investments with longer maturities. We are not dealing with the collapse of FTX, where investors lost their deposits, but rather an orderly resolution." - Dave Weisberger, CEO of trading platform CoinRoutes
The environment for crypto companies remains tough
Silvergate's exit further complicates the process of finding banking partners for U.S. crypto firms. Top banking regulators sent out guidance a few weeks ago warning financial institutions about the risks of doing business with crypto companies. Some in the industry have since reported serious difficulties in locating a banking partner at all.
I don't want to alarm, but since the turn of the year, a new Operation Choke Point type operation began targeting the crypto space in the US. it is a well-coordinated effort to marginalize the industry and cut of its connectivity to the banking system - and it's working
— nic carter (@nic__carter) February 7, 2023
