Silvergate shuts down its crypto payment network
Silvergate Capital Corp. on Friday shut down the Silvergate Exchange Network for cryptocurrency payments, calling it “a risk-based decision” with immediate effect.
The move comes at a time of financial uncertainty for the bank, which last week delayed its 10-K filing and acknowledged it may be “less than well capitalized.”
Silvergate was the first traditional bank to develop this type of payment network, according to The Motley Fool. Customers included “all the major crypto exchanges and more than 1000 institutional investors.”
All other deposit-related services remain operational, the bank wrote on its website.
After filing on Wednesday, several Silvergate partners, including Coin basecircle, PaxosGalaxy Digital, LedgerX and bit stamp, stopped its business with the bank.
Coinbase said the decision was made “in light of recent developments and out of an abundance of caution.” Circle said the process of winding down the Silvergate relationship had begun last year, “as signs of trouble and broader risk exposure to cryptoassets became increasingly apparent.”
An executive at the stablecoin company Tether took to Twitter to deny a meaningful exposure to the bank.
“This is a very bad sign. By waiting until after the business is closed to announce this, none of the money can leave now,” J. Austin Campbell, an assistant professor at Columbia Business School, told Bloomberg after the closing of the Silvergate Exchange Network. The good news is that many crypto people have already cut ties with Silvergate and moved away from them – it’s less catastrophic than it could be.”
Silvergate’s challenges began with the collapse of crypto exchange FTX and its sister companies, which followed alleged wrongdoing by FTX executives including Sam Bankman-Fried, whose 12-count criminal trial is set to begin in October.
After a bank run started by FTX’s collapse, tthe bank approached the Federal Home Loan Bank of San Francisco for a $4.3 billion cash injection. In January, that accounted for nearly all of the bank’s $4.6 billion in cash, according to American Banker.
By taking the cash injection, Silvergate further introduced crypto market risk into the traditional banking system, according to three US senators in a letter to Silvergate CEO Alan Lane.
The bank failed “miserably” to detect the misuse of funds by FTX and sister company Alameda Research, the senators said. The Ministry of Justice followed suit open a probe into how much the bank knew about FTX managers’ alleged misdeeds. In its filing, Silvergate cited the probe and increased regulatory scrutiny as factors that could affect its financial results.
Also on Friday, the judge presiding over crypto lender BlockFi’s bankruptcy case told Silvergate that it must return around $9.8 million deposited by BlockFi immediately. BlockFi filed for bankruptcy in November after exposure to FTX.
Silvergate’s share price was $5.93 on Monday morning, up from $5.35 at the close on Friday. That’s a 65.8% drop from the start of 2023, and a 94% drop from 12 months ago.
Silvergate did not return a request for comment by press time.
