Silvergate Becomes First US Bank Casualty of FTX Collapse

After the loss suffered from FTX, the cryptocurrency-focused bank Silvergate has decided to shut down its business.

Silvergate Capital Corp., a bank specialising in cryptocurrencies, announced on Wednesday that it will voluntarily dissolve due to losses sustained from the sudden closure of crypto exchange FTX, sending its shares 35% lower in after-hours trading.

But the bank said full repayment of all deposits is part of its plan for winding down and liquidation.

"In light of recent industry and regulatory developments, Silvergate believes that an orderly wind-down of bank operations and a voluntary liquidation of the bank is the best path forward," the company said in a statement. "The bank’s wind-down and liquidation plan includes full repayment of all deposits."

Silvergate, one of the most well-known banks in the crypto industry, is based in California. Its unfortunate circumstances demonstrate how widespread the effects of FTX's bankruptcy in November, which resulted from its inability to pay for customer withdrawals, were.

The bank's decision to close comes after the company said last week that it was reevaluating its business viability because it had sold more debt instruments at a loss this year and that more losses could leave it "less than well capitalized."

The law firm Cravath, Swaine & Moore LLP and the financial advice firm Centerview Partners LLC have been hired by Silvergate.

Contagion Risks From Silvergate

Funds expect only minimal contagion risks from Silvergate's latest decision to shut shop.

"Almost everyone had foreseen the closure of the crypto payments network after Silvergate's announcement last week," said a chief investment officer at a large US investment management firm in Boston.

"What weighed further is the decision by the bank's partners, including high-profile firms like Coinbase Global and Galaxy Digital, to sever ties with Silvergate," added the CIO.

One of Silvergate's most popular features, the Silvergate Exchange Network for cryptocurrency payments, was shut down last week.

Unlike bank wires, which can take days to clear, this network made it possible for investors and crypto exchanges to make instant transactions 24 hours a day, 7 days a week.

Ram Ahluwalia, CEO of digital asset investing firm Lumida Wealth, told Reuters that since Silvergate has assured its customers that they would be repaid and has performing loans, the chance of a domino effect is low. Still, the loss of the Silvergate Exchange Network is unfortunate.

"It's more of a strategic loss of critical infrastructure for crypto," added Ahluwalia.

The contagion risks are not just from the collapse of FTX.

As interest rates increased in 2022, investors fled the cryptocurrency market, a risky asset class that is wiping off over a trillion dollars in value.

That is widely known as the "crypto winter."

A fund manager based in Washington said, "the impact of 'crypto winter' is being felt now. The industry has more downside from a staggering US$1 trillion loss last year."

"Apart from the FTX fiasco, the spillover risks from the staggering value loss are increased scrutiny and regulations," he added.

What hasn't helped is "recent industry and regulatory developments," Silvergate claimed in a statement, and said that shutting down was the "best path forward."

Silvergate's Story So Far

Silvergate announced late on Friday that it had made a "risk-based decision" to immediately shut down its Silvergate Exchange Network (SEN).

After that announcement, crypto-related deposits plunged, and Silvergate's stock struck a new low, plunging 98% from its record high at the end of November 2021 and wiping off almost $7 billion in market capitalization.

During the fourth quarter, investors rushed to pull out almost $8 billion from Silvergate. This cost the company $1 billion.

This week, Silvergate lost several of its business partners, leaving the crypto bank with no choice but to close operations.

The bank's collapse comes amid intense scrutiny. The Justice Department's fraud branch was looking into Silvergate's ties with defunct cryptocurrency titans FTX and Alameda Research.

Although no misconduct was claimed, Silvergate's problems escalated as the bank liquidated assets at a loss and discontinued its main payments network, which it described as "the core" of its suite of crypto client services.

According to the FDIC's website, this is the first bank collapse in the United States since 2020, when there were four due to the pandemic.

Contrarian Bets on Silvergate Sour

The banking industry's first casualty of the collapse of the crypto business, Silvergate, declared its closure just months before a firm named Block.one was increasing its investment in the sector.

Even as Silvergate's stock price plummeted, depositors withdrew their funds, and short sellers waited in the wings, Block.one and its CEO Brendan Blumer were major purchasers.

Block.one, along with Blumer, increased their stake in Silvergate by the end of December, making them the company's largest investor with a combined 9.9% ownership.

The company's long-time backers include Peter Thiel and Alan Howard.

"Silvergate’s current equity prices do not accurately reflect their strong balance sheet, their strategic positioning, or their market-defying growth trajectory, and therefore offer a unique investment opportunity," Block.one said in the November statement disclosing its initial purchase. "We are excited to be a new passive shareholder."

That wasn't just Block.one there. Financial papers published on the website of money manager Miller Value Partners LLC revealed a fourth-quarter growth in the firm's shareholding.

The renowned investor Bill Miller, who oversaw Legg Mason's value investing strategies for decades, founded Miller.

If Silvergate had been able to withstand the storm, investing in them would have been a brave contrarian move.

Silvergate stock has dropped 70% since the end of 2022, and after-market trading on Wednesday saw a further 40% drop from the previous day's closing price of $4.91.

Block.one rode along for much of the decline, selling off its holdings only last week after the bank missed a deadline for filing its annual report and discontinued a payments network that was popular among cryptocurrency businesses.

"While we are disappointed with this outcome, we remain unwavering that banks and other financial institutions embracing the digital asset and cryptocurrency sectors are well-positioned to use technology to advance the capabilities of both the traditional financial services and the new burgeoning digital asset economy," Block.one said in a statement Wednesday on its website.

Silvergate said on Wednesday that it is "considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets."

Aaron Klein, a senior fellow with the Brookings Institution who studies financial technology and regulation, said the outcome isn’t all that surprising in the end.

"There’s nothing new here," he said. "Borrowing short and lending long has been the subject of bank failure for centuries."

The world of Web3 can be quite a whirlwind. Here at Blockhead, we understand how busy crypto is keeping you, so we kindly send out three newsletters each week: BlockBeat for a wrap-up of the week’s news; Blockhead Brief for weekend happenings as well as what to look forward to in the week ahead; Business Bulletin for the most important business and economic developments in the industry. To avoid FOMO and access member-only features, click here to subscribe.