Silvergate’s Big Crypto Feed Dispels Watchdogs’ Worst Fears

(Bloomberg) — For months, U.S. officials have raced to sever ties between banks and risky crypto ventures. They might be too late.

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In a stark warning from a U.S. bank serving the sector, Silvergate Capital Corp. said Wednesday it needs more time to assess the extent of the damage to its funds from the crypto crash last year — including whether it could be viable. Shares fell about 30% in premarket trading on Thursday.

The company, which already reported a loss of $1 billion in the fourth quarter, said that figure could rise further. The company is still calculating the cost of selling the property quickly to repay the advance from the Federal Home Loan Banking System. It may also need to indicate the value of some of the remaining shares.

It “could be less than well capitalized,” La Jolla, California-based Silvergate wrote in a regulatory filing. “The company is assessing the impact these subsequent events will have on its ability to continue as a going concern.”

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Such approval by a lender with federally insured deposits and more than $11 billion in assets will heighten debate among U.S. lawmakers and regulators about whether banks can manage the risks associated with digital assets.

For a time, Silvergate excited its shareholders with what seemed like an innovative approach: siphoning cash deposits from crypto ventures to invest in more stable bonds. But when Sam Bankman-Fried’s FTX empire collapsed in November, the bank’s clients largely backed out to weather the storm, forcing it to offload reserves at a loss.

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“This confirms fears many regulators had,” said Todd Baker, senior fellow at Columbia University’s Richman Center for Business, Law and Public Policy. “If this bank fails, it’s an example of why banks should be more conservative in dealing with crypto companies.”

Even if that doesn’t happen, Silvergate’s woes will prompt even more caution on the part of regulators, he said.

Warnings from regulators

In fact, the American crackdown has already begun.

In early January, three major financial regulators – the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation – issued a stark warning to banks not to allow uncontrolled crypto-related risks. affect the banking system.

Later that month, crypto firm Custodia Bank Inc. announced plans to acquire the central bank’s payment system. Rejecting its bid, the central bank piled on with a policy statement. Last month, Bloomberg reported that Binance Holdings Ltd., the world’s largest cryptocurrency exchange, is considering whether to end its ties with U.S. partners amid a tougher regulatory regime.

Meanwhile, the Securities and Exchange Commission targeted stablecoin issuers and the practice of generating yield by holding tokens, known as staking.

Silvergate has plunged deep into the US policy debate, revealing in early January how it is bolstering its balance sheet by selling billions in assets to pay depositors. By the end of last year the company had $4.3 billion in short-term Federal Home Loan Bank advances, which were originally created under President Herbert Hoover to boost mortgage lending.

The bank said on Wednesday that it sold more bonds in January and February to pay those advances, which could add to its losses.

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“All advances were fully bonded at all times when outstanding,” Federal Home Loan Bank of San Francisco said in a statement Wednesday.

market way

Silvergate’s stock fell more than 88% last year, first as crypto prices fell and then FTX collapsed. Shares have been on a roller coaster since then — at one point swinging more than 50% in a single day — as investors struggled to gauge the company’s prospects for revival.

Shares soared in mid-January as the company outlined steps to move forward. But at the end of the month, a bipartisan panel of US senators accused Silvergate of being “evasive” about the extent of its ties to FTX and Bankman-Fried’s Alameda Research investment arm. Days later, Bloomberg reported that the Justice Department’s fraud division was looking into the bank’s dealings with FTX and Alameda.

On Wednesday, Silvergate listed the Justice Department’s investigation and increased regulatory scrutiny among factors that could ultimately affect financial results.

Its legacy and extensive regulatory crackdown on the crypto market will complicate any attempt to find a buyer.

Banking problems could have implications for cryptocurrencies.

Its current predicament could make other banks reluctant to work with crypto ventures, resulting in a chilling effect on the industry, said Henry Elder, head of decentralized finance at digital-asset manager Wave Financial.

“They’re a crypto bank,” Elder said. “You’re definitely not going to see anyone come in as a crypto bank until there’s more clarity.”

–With help from Olga Garif.

(The second column updates with premarket trading.)

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