The crypto winter is coming for Silvergate Capital
Silvergate Capital is in trouble.
The California-based company had become a popular place for cryptocurrency companies to tap. But in one regulatory filing On March 1, Silvergate wrote that it is concerned that it may soon become “less than well capitalized,” which is one way of putting it.
In January, Silvergate reported loss for the fourth quarter of 2022 totaling more than 1 billion dollars and warned that these losses could continue to mount. The company too cut 200 jobs — about 40% of the workforce — in January, citing “the economic realities facing the industry in digital assets today.”
TThe company’s shares have also fallen. It is now down from a record high of $220 per share on November 19, 2021 to below $8 per share today – an all-time low. This new low came after the company admitted that the US Department of Justice can investigate it — allegedly over his commitment with the collapsed crypto exchange FTX. JPMorgan too downgraded the stock from “neutral” to “underweight” and Coinbase, a publicly traded crypto exchange, announced it is dropping Silvergate as a banking partner.
What is Silvergate Capital?
Silvergate is a federally insured bank that handles cryptocurrencies – in a roundabout way. Instead of issuing deposits and withdrawals in bitcoin, ether or another digital currency, however, the company set up an instant payment network for cryptocurrency-focused customers, such as crypto exchanges and crypto investors, to move large amounts of fiat money between each other quickly — and overnight and weekends when a traditional bank is usually closed.
So while Silvergate does not directly trade cryptocurrencies, which are a highly speculative asset class, most of its clients do. That means the bank has been hit hard by the broader crypto industry’s failures over the past year.
Silvergate, for example, counted FTX, the crypto exchange that collapsed and filed for bankruptcy in November, as one of its clients. The authorities later arrested Sam Bankman-Fried, who ran and co-founded the exchange. He now faces 12 civil and criminal charges related to fraud.
Congress investigates Silvergate
A group of US senators, including Massachusetts Senator Elizabeth Warren, recently sent Silvergate a letter (pdf) examines his knowledge of FTX’s business practices. The senators also criticized Silvergate in the letter for taking out a loan from the Federal Home Loan Bank of San Francisco (FHLB) to stave off a bank run.
The senators wrote that Silvergate “further introduced crypto market risk into the traditional banking system” by using the FHLB as its “functional lender of last resort.” Doing so could give the FHLB a claim on the bank’s assets should it default, before the Federal Deposit Insurance Company (FDIC).
