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Silvergate Capital is running out of customers as fast as it is running out of time and money, and that will likely leave the already battered crypto industry in the US with few places to look for banking partners.
The crypto-friendly bank has been looking at who of the industry is paring on Thursday, a day after warning in a regulatory filing that it may be “less than well-capitalized” and saying it is “re-evaluating its business.” The stock plunged by about 50% and partners came out quickly to say they were moving to other alternatives.
Coinbase, Circle, Paxos, and Gemini are among several companies that have publicly said they are cutting ties with banks on some level, while people familiar say market maker and over-the-counter trading companies GSR, Wintermute, and Blockchain .com is ditching its Silvergate Exchange Network. SEN allows Silvergate clients to send US dollars and euros 24 hours a day. The network has been a key driver of the bank’s growth, last year handling more than $560 billion in volume, according to data from The Block.
“Almost all liquidity is gone from SEN and has moved to other, safer banks,” said a source close to the counterparty, adding that “we need more options.”
“Silvergate is working diligently to file the 10-K as soon as possible and there will be no further comment at this time,” a bank spokesperson told The Block.
‘We will adapt’
And the choices are limited. Signature Bank, which took Coinbase Prime users in randomization today, is now one of the leading remaining banking partners, but is working to reduce its crypto transactions. Cross River Bank in the US and offshore options like Deltec are still around.
“Short term it will be a surprise but it shouldn’t be as big as the same event we experienced last year,” said Laura Vidiella, vice president of business development and strategy at digital asset investment firm LedgerPrime. “In the medium to long term we will adapt to any new circumstances.”
Other agencies may yet step up, but the current regulatory environment may make that impossible given Silvergate’s current predicament.
The La Jolla, California-based bank, which reported a $1 billion loss in the fourth quarter, has received regulatory and political scrutiny for its ties to the digital asset industry, particularly FTX and Alameda Research. Wednesday’s filing with the SEC confirmed an investigation by the Justice Department into the bank, as well as the bank’s regulatory and congressional investigations, and cited “safety and health concerns” for a business model “concentrated on digital asset-related activities.”
Crypto bank, mortgage loan
Silvergate had to take out a $4.3 billion cash-down loan from the Federal Home Loan Bank of San Francisco in the fourth quarter, but closed its wholesale mortgage lending business a few weeks later.
The use of a congressionally mandated system aimed at keeping access to home loans stable is causing concern on Capitol Hill. That prompted a bipartisan group of senators to blast Silvergate CEO Alan Lane for his “evasive” response to the previous letter and demand more information about the progress of the FHLB.
The senators said that if Silvergate failed, “because banks face a fraction of the withdrawal rates Silvergate faced – the FHLB could ‘assert priority statutory liens on other assets – essentially putting the Home Loans bank above all other lenders,’ including Federal Deposit Insurance Company (FDIC) deposit insurance fund.
That could lead to a scenario where taxpayer money saves Silvergate depositors.
An FDIC spokesman declined to comment on the situation, citing the agency’s policy of not commenting on “open and operating institutions”.
With Silvergate’s fate uncertain, the crypto industry is left looking for alternatives. For some longtime digital asset participants, the worst-case scenario will throw the market back a decade. Transactions will be finalized over the wire and move slowly, while retail investors could feel a huge difference as companies like Signature look to stay away from this type of business.
Bad past
“We’re going back to 2014, everyone was going to have a small mid-level regional bank until they got uncomfortable with the KYC burden, then you switch to another bank,” Dan Matuszewski, who previously managed the trading desk on top of the Circle desk and now runs the fund hedge, to The Block. “There may be a world—potentially—where there is no card business for exchange. Stablecoins are nice and helpful once you’re in it. But moving money in and out will be difficult.”
LedgerPrime’s Vidiella, on the other hand, told The Block that she saw a possible silver lining.
“It will have to be seen how the story develops,” he said. “But from there we can eventually see more guidance around regulations for on-ramp and off-ramp transactions and the relationship between traditional banks and exchanges.”
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