Crypto-focused bank Silvergate plans to wind down following blow from FTX

March 8 (Reuters) – Crypto-focused bank Silvergate Capital Corp ( SI.N ) said on Wednesday it plans to close operations and voluntarily liquidate after being hit with losses following the dramatic collapse of crypto exchange FTX, sending shares of its 35% in after-hours trading.

The decision to close the bank comes after the company warned last week that it was assessing its ability to continue as a going concern, revealing that it had sold additional debt securities this year at a loss and that further losses mean the bank could be “less than in fine print.”

The dire outcome for La Jolla, California-based Silvergate, one of the crypto industry’s favorite banks, shows the extent of the impact on the digital asset industry from the collapse of FTX, which filed for bankruptcy in November after failing to cover withdrawals of customers.

In a statement, Silvergate said the decision to close its bank was the “best way forward” in light of “recent industry and regulatory developments”. Its closure and liquidation plan includes full repayment of deposits, the bank added.

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Multiple partners of the bank, including high-profile firms such as Coinbase Global Inc ( COIN.O ) and Galaxy Digital, cut ties with Silvergate last week.

After Silvergate’s statement, crypto exchange Coinbase said it has no customer or corporate money in Silvergate, while Binance CEO Changpeng Zhao said the company had no asset losses in Silvergate.

Silvergate reported a loss of $1 billion for the fourth quarter as investors scrambled to withdraw more than $8 billion in deposits.

Silvergate has retained Centerview Partners LLC as financial advisor and Cravath, Swaine & Moore LLP as legal counsel, the bank said in a statement.

[1/2] Representations of cryptocurrencies are submerged in water in this illustration taken on May 23, 2022. REUTERS/Dado Ruvic/File Photo

Founded in 1988, Silvergate entered crypto in 2013. The bank had also operated a mortgage warehouse business, but announced in December that it would close that division, citing the rising interest rate environment and declining mortgage volumes.

Last week, Silvergate shut down the Silvergate Exchange Network, its crypto payment network and one of its most popular offerings. That network enabled round-the-clock transfers between investors and crypto exchanges, unlike traditional bank wires, which can often take days to settle.

While the risks of contagion are minimal, given that Silvergate has said it will repay depositors and has performing loans, the loss of the Silvergate Exchange Network is disappointing, said Ram Ahluwalia, chief executive of Lumida Wealth, an investment adviser specializing in digital . assets.

“It’s more of a strategic loss of critical infrastructure for crypto,” he said.

The Federal Deposit Insurance Corporation (FDIC) declined to comment Wednesday when asked about the bank failure, except to say it does not regulate the bank or the holding company. Bloomberg earlier reported that the FDIC had discussed with Silvergate ways to avoid a shutdown.

Federal prosecutors in Washington are investigating the company and its dealings with FTX and trading firm Alameda Research. In January, three US senators asked Silvergate for details about risk management and FTX.

In a statement, the California Department of Financial Protection and Innovation, which oversees Silvergate under a state statute, said it was evaluating the bank’s compliance with financial laws, as well as safety and soundness obligations, and was working with its relevant counterparts. federal.

More than a trillion dollars in value was wiped from the crypto sector in 2022 as rising interest rates exacerbated fears of an economic downturn.

After soaring in 2020 and 2021, bitcoin — the most popular digital currency by far — fell more than 60% last year, putting pressure on the digital asset industry.

Reporting by Hannah Lang in Washington and Anirban Chakroborti in Bengaluru; Additional reporting by Manya Saini and Mrinmay Dey in Bengaluru Editing by Maju Samuel, Matthew Lewis and Lincoln Feast.

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