Crypto Bank Silvergate sees client exodus as delayed annual report puts future in doubt

Silvergate Bank is losing customers by the minute as major cryptocurrency firms halt transfers via the bank’s Silvergate Exchange Network (SEN) real-time payment platform.

The client exodus began Thursday morning after the company’s announcement that it would review its ability to remain in business. Silvergate shares lost more than half their value on Thursday, ending at $5.75 after closing at $13.53 on Wednesday.

The crypto bank’s problems stem from last year’s downturn in the cryptocurrency markets, which has led to many of its customers withdrawing from digital assets. Last month, Bloomberg reported that the Justice Department was investigating Silvergate’s relationship with the failed FTX exchange and its hedge fund affiliate Alameda Research, which was at the heart of late-year’s plunge in cryptocurrencies.

“In the wake of FTX, crypto investors are likely to sell first and ask questions later when a management’s credibility is called into question,” said Brian Dobson, managing director of SPACs and disruptive technologies at Chardan Capital Markets.

A Silvergate spokesperson said it is “working diligently to file the 10-K as soon as possible and has no further comment at this time.” Crowe LLP, which has served as the bank’s accounting firm since 2015, did not respond to requests for comment.

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Coinbase was the first to announce it would no longer accept or initiate payments with the bank. The only publicly traded crypto exchange in the US, Coinbase said it would end payment transactions with Silvergate “in light of recent developments and out of an abundance of caution.”

“Coinbase will facilitate institutional client cash transactions with our other banking partners and has taken proactive measures to ensure that customers do not experience any impact from this change,” the company added.

Since then, Paxos, one of Silvergate’s largest depositors, and US digital currency (USDCUSDC
) issuer Circle has also suspended SEN transactions.

A Paxos spokesperson said the crypto brokerage had no significant exposure to Silvergate, add in a Twitter post that it had suspended SEN transfers and transfers to its Silvergate account.

Circle said that it is in the “process of discontinuing certain services with them and notifying customers,” adding that it was sensitive to the concerns surrounding the crypto bank.

Galaxy Digital, a crypto and blockchain investment business also terminated Silvergate transfers. “As a firm we still have no significant exposure to Silvergate and this action was taken out of an abundance of caution to ensure client and firm assets are secure as part of our robust risk management process,” said Michael Wursthorn, Director of Communications at Galaxy Digital.

Other Silvergate customers include the Binance.US exchange and crypto investor MicroStrategyMSTR
and BlockTower did not respond to Forbes requests for comment.

Silvergate said in an SEC filing on Wednesday that it would not be able to complete its 2022 annual report because it needed more time to evaluate financial reporting and prepare disclosures about events that occurred early this year that were not included in a 17. January. announcement of Q4 results.

The new developments in 2023 included “the sale of additional investment securities in excess of what was previously anticipated and disclosed in the earnings release, primarily to repay in full the company’s outstanding advances from the Federal Home Loan Bank of San Francisco.” Silvergate disclosed on January 5 that it had received $4.3 billion in short-term advances from the San Francisco FHLB. The latest filing said it sold bonds in January and February and expects to record further losses on its securities portfolio.

The filing on Wednesday also stated that the company and its Silvergate Bank subsidiary could be “less than well capitalized” following declines in its securities portfolio. Analysts at Morgan StanleyMS
pointed out in a report that the term has a specific meaning in banking regulation and estimated that Silvergate could slip into the “adequately capitalized” category. The analysts estimated that additional securities losses could be as high as $125 million.

Several Wall Street firms downgraded the bank’s shares, including JP Morgan, which cut Silvergate to underperform from neutral, while Cannacord Genuity and Compass Point Research & Trading trimmed their calls to neutral from buy, according to StarMine.

“With the company having sold additional securities (beyond guidance) as losses in January/February, this reflects that the company faces continued liquidity challenges,” JPMorgan analysts wrote.

6:00 PM ET: Updates with comment from Silvergate Bank spokesperson.