Customers of the cryptocurrency-focused US bank Silvergate have withdrawn more than $8 billion in crypto-linked deposits. In the final three months of 2022, roughly two-thirds of the bank’s customers withdrew their deposits. To cover the costs and remain liquid, the bank sold $5.2 billion in assets.
It came as three US regulators warned banks that issuing or holding crypto was “highly likely to be inconsistent with safe and sound banking practices”.
Silvergate is a bank that is listed on the New York Stock Exchange and is thus subject to financial regulation. It is one of only a few companies in this industry that offers cryptocurrency services.
The withdrawals followed the collapse of the FTX crypto exchange, which was once valued at $32bn before its bankruptcy filing in November.
Sam Bankman-Fried, the former CEO of FTX, has pleaded not guilty to charges of defrauding customers and investors. Prosecutors claim that up to one million creditors may have lost money.
The case has shook the entire crypto industry, prompting bankruptcy filings at other companies and a drop in crypto values.
Alan Lane, chief executive of Silvergate, said the bank was selling assets to cover the withdrawals by customers “in response to the rapid changes in the digital asset industry”.
Silvergate is the latest victim of the industry’s chilling “crypto winter,” which began last spring.
The so-called crypto bank occupied a fairly unique market position, serving as a bank for cryptocurrency companies that were unable to obtain banking services from traditional sources.
One of its customers was the now-bankrupt Alameda Research, which was owned by Sam Bankman-Fried, who is facing fraud charges in the United States.
That is a setback for Silvergate, but Bankman-demise Fried’s has delivered a bigger one: market confidence.
Since the collapse of Bankman-empire, Fried’s investors of all sizes have been withdrawing funds from crypto companies, with billions transferred from companies that store crypto funds.
So far, the largest companies in the space, such as Binance and Coinbase, have weathered the unprecedented withdrawals, and it appears that Silvergate is doing the same for the time being, albeit at a significant cost to its balance sheet.
Before entering the world of cryptocurrency, Silvergate was a small US bank that went public in November 2019.
At the market’s peak in 2021, its shares had increased by more than 1,500%, thanks in large part to the massive growth of cryptocurrency during this time period.
It attempted to launch its own stablecoin during this time, which is a type of cryptocurrency that is directly linked to an asset such as gold, the US dollar, or other cryptocurrencies.
In January 2022, Silvergate paid $182 million to acquire the technology behind Meta’s proposed Diem (formerly Libra) stablecoin, which never materialized.
The bank stated in a filing to the US Securities and Exchange Commission that it had sold debt to cover the withdrawals and had written off the Diem purchase, which means it is no longer counted as an asset.
It has also reduced its workforce by 40%, or approximately 200 people, and the withdrawals have cost the bank $718 million, which is more than its profit since 2013.
(Adapted from BBC.com)