Silvergate Bank, a digital asset-friendly bank, faces possible bankruptcy and regulatory issues following the collapse of Sam Bankman-Fried’s (SBF) empire. The bank has delayed the release of its 2022 annual report and admitted a “going concern” regarding its ability to survive financially.
Long-time critic and short-seller Marc Cohodes predicts a bankruptcy filing could arrive before Monday and that its CEO Alan Lane should face federal charges. Customers withdrew over $8 billion in deposits from the bank after FTX collapsed, contributing to Silvergate’s nearly $1 billion loss in the final quarter of 2022.
Several digital asset companies are actively terminating their relationship with the bank, including USDC issuer Circle and Coinbase, which said it would no longer use the bank to process deposits and withdrawals. Silvergate faces class-action lawsuits from investors alleging the bank failed to warn them about its deficiencies in anti-money laundering protocols.
The lead plaintiffs claim to have lost millions on their investments in Silvergate shares. Shares traded down 57% on March 2nd alone, and shares are 97% below all-time highs in November 2021. State Street, Blackrock, and Citadel Securities hold significant stakes in Silvergate. EOS co-creator Brendan Blumer bought a 9.3% stake in the bank last November, making him its largest shareholder.
FDIC might overtake the Silvergate
Silvergate is systemically important to the crypto industry, according to David Gerard, as the Bank for International Settlements Basel III bank monitoring report for February 2023 indicates that 61.7% of the total, worldwide, crypto asset prudential exposures were “almost certainly” held by the bank. Gerard estimates this based on Silvergate’s bitcoin-secured loans to MicroStrategy and bitcoin miners. If the bank collapses, the Federal Deposit Insurance Commission (FDIC) might overtake the bank in order to protect depositors, liquidate assets, and facilitate its orderly dissolution.
The uncertainty surrounding Bank’s financial situation has raised concerns among investors and regulators alike. If the bank were to file for bankruptcy, it could have serious implications for the crypto industry as a whole. Silvergate is a key player in the industry, offering banking services to many crypto companies and serving as a bridge between traditional finance and the digital asset space.
The impact of FTX collapse on Silvergate’s business
The collapse of SBF’s empire, which included FTX and Alameda Research, dealt a significant blow to Silvergate’s business. The bank had a close relationship with the two companies, which were among its biggest customers. When FTX collapsed, customers withdrew billions of dollars from Silvergate, leading to a significant loss in the final quarter of 2022.
The bank’s troubles have been compounded by class-action lawsuits from investors who claim they lost money due to the bank’s deficiencies in anti-money laundering protocols. The lead plaintiffs include a teachers’ pension fund and state-managed retirement funds, who allege they lost millions on their investments in the bank shares.
Customers terminating their relationship with Silvergate
Silvergate’s troubles have also led to major customers terminating their relationships with the bank. USDC issuer Circle recently announced it was “unwinding” its relationship with the bank, which could impact some of its services. Coinbase, one of the largest crypto exchanges in the world, said it would no longer use the bank to process deposits and withdrawals.
The situation has also attracted the attention of regulators. The Securities and Exchange Commission (SEC) has granted the bank an extension of time to evaluate “internal controls over financial reporting.” Crowe LLP, auditors of Silvergate’s finances, have not signed their audit of the bank’s fourth-quarter finances. The bank’s admission of a “going concern” has raised concerns about its ability to survive financially.
The potential bankruptcy of Silvergate Bank highlights the risks and challenges facing the crypto industry. As the industry continues to grow and evolve, it will face increasing regulatory scrutiny and will need to navigate complex financial and legal challenges. While the long-term prospects for the industry remain positive, events like this serve as a reminder of the risks involved and the need for careful planning and risk management. Investors and industry participants will be closely monitoring the situation and its implications for the broader crypto ecosystem.