‘Crypto’ firms unbank themselves from struggling Silvergate

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Crypto-friendly Silvergate Bank looks short for this world as U.S. regulators and law enforcement agencies seek to prevent ‘crypto’s’ woes from impacting the broader financial sector.

Late Wednesday, the California-based Silvergate notified the U.S. Securities and Exchange Commission (SEC) that it wouldn’t be filing the annual report on its fiscal health by March 16. That deadline was an extension from the previously scheduled deadline, but the company insisted it “requires additional time” to fully diagnose its shortcomings.

The filing is a doozy, containing the stark warning that the company was “evaluating … its ability to continue as a going concern for the twelve months following the issuance of its financial statements.”

Among the factors weighing down Silvergate is “the sale of additional investment securities beyond what was previously anticipated.” When Silvergate issued its preliminary Q4FY22 results in January, it mentioned $1.1 billion in unrealized fair-value losses on held-for-investment securities.

With the crypto market unable to regain its unwarranted heights of the 2021 value bubble, Silvergate was forced into a fire-sale of debt securities in January/February, suddenly making those previously unrealized losses all too real. Silvergate also warned that it “expects to record further losses related to the other-than-temporary impairment on the securities portfolio.”

Silvergate was also required “to repay in full the Company’s outstanding advances from the Federal Home Loan Bank of San Francisco [FHLB].” Silvergate announced in January that over 93% of its cash on hand had been provided by the FHLB, a Depression-era program intended to ensure banks could continue to issue mortgages during financial panics.

Silvergate’s reliance on $4.3 billion in FHLB loans to keep its doors open prompted pushback from some U.S. senators who expressed concern that, should Silvergate not survive, the taxpayer-funded Federal Deposit Insurance Corporation (FDIC) could be left “holding the bag.”

The crypto market suddenly realized that U.S. financial regulators weren’t kidding when they issued that January joint statement warning banks of the potential risks of dealing in crypto. Their primary concern was limiting any further fallout from crypto bankruptcies so that the non-crypto public remained insulated from the speculative nonsense.

At their peak during the height of November 2021’s crypto bubble, Silvergate Capital Corp shares were trading as high as $220. After closing Wednesday at $13.53, Silvergate’s shares lost nearly one-third of their value in after-hours trading and even more in Thursday’s pre-market trading. Silvergate closed Thursday down nearly 58% to a record low of $5.72 and continued its negative trajectory in after-hours trading.

Legal woes

Also contributing to Silvergate’s uncertain future are “regulatory and other inquiries and investigations against or with respect to the Company, investigations from our banking regulators, congressional inquiries and investigations from the U.S. Department of Justice.”

Before the dramatic fall from grace of digital asset exchange FTX, Silvergate’s website featured a testimonial from disgraced FTX founder Sam Bankman-Fried, who said:

“Life as a crypto firm can be divided up into before Silvergate and after Silvergate … the Silvergate™ Exchange Network (SEN) proves it is one of the key backbones of the cryptocurrency settlement layer.”

As detailed in last week’s superseding indictment of SBF, Silvergate’s lackadaisical approach to oversight of who/what was transacting on the 24/7 SEN platform was on full display in its approval of North Dimension—a fake electronics retailer set up by FTX to facilitate payments to/from its U.S. customers—based solely on assurances of propriety from SBF.

Silvergate also permitted an entity connected to the international Binance exchange to siphon $404 million from accounts that ostensibly belonged to Binance’s ‘independent’ U.S.-facing offshoot.

With mainstream banks reaching 10-figure settlements to atone for their role in facilitating other Ponzi schemes, a class action suit accusing Silvergate of being “integral to Bankman-Fried’s enterprise” may be only the tip of Silvergate’s legal woes. Speculation is mounting over how long it will be before Silvergate CEO Alan Lane is perp-walked out of his offices by federal law enforcement.

Fallout

The Coinbase (NASDAQ: COIN exchange announced Thursday that client funds remained “safe, accessible and available” but “in light of recent developments & out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate.” Coinbase further stated that it had “taken proactive action to help ensure that clients experience no impact from this change.”

Circle, which issues the USDC stablecoin in a partnership with Coinbase, said it was “sensitive to the concerns around Silvergate and are in the process of unwinding certain services with them and notifying customers.”

In a bit of unfortunate (or ominous, depending on how conspiratorial you are) timing, Coinbase reminded customers that it would be “conducting a scheduled technical upgrade” starting March 4, during which “trading, transfers, and access to funds will be disabled.”

From frying pan to fire

Coinbase also instructed Coinbase Prime customers to “update your Coinbase payment instructions to Signature Bank.” The New York-based Signature has its own 24/7 crypto settlement network called Signet. However, with the regulatory walls closing in—and Signature facing its own class action suit for enabling SBF’s antics—it’s anyone’s guess how long Signature will choose to maintain its own crypto ties.

Case in point: Bloomberg reported Wednesday that the San Francisco-based Kraken exchange had informed its non-corporate customers that they would no longer be able to make USD transactions with Signature, with deposits cut off effective March 15 and withdrawals following suit on March 30. Kraken has been in the news for all the wrong reasons lately, but Signature previously stated that it was looking to significantly reduce its overall crypto exposure.

That spells trouble for companies like LedgerX, the futures exchange that was once part of SBF’s empire. On Monday, LedgerX beat most of its crypto rivals to the punch by informing its customers that it was transferring its business from Silvergate to Signature. Again, for how long?

Signature’s share price fell nearly 3% on Thursday and fell another half-point in after-hours trading. Seems investors are less than impressed that many crypto firms are sending Signature more of their business.

Signature did issue a somewhat ‘meh’ mid-quarter financial update on Thursday, which largely focused on its shrinking deposits as it purges crypto clients. But despite the brevity of the update, the bank nonetheless found space to include a “reminder” that it “does not trade, does not custody, and does not lend against or make loans collateralized by digital assets.”

Run to the hills

Meanwhile, countless crypto firms are doing their damnedest to avoid being sucked into Silvergate’s death spiral. Paxos Trust said Thursday that it had “discontinued all SEN transfers and wires to our Silvergate account” but would “continue to process all outgoing payments.”

The Winklevoss twins’ struggling Gemini exchange announced that it had “stopped accepting customer deposits / processing withdrawals via ACH and wire transfers through Silvergate” but insisted that they “currently have zero customer funds and zero GUSD [proprietary stablecoin] funds held at Silvergate.”

A nearly identical statement was issued by Mike Novogratz’s Galaxy Digital “out of an abundance of caution.” Galaxy took the opportunity to pat itself on the back for employing a “vigorous risk-management process” (which must not have been in place back when Novogratz got that infamous ‘Luna’ tattoo).

Crypto.com, Cboe Digital, and even Tether issued similar ‘nothing to see here’ notices (although Tether routinely denies any liabilities from crypto collapses, regardless of the reality of its exposure). The Bitstamp exchange warned its customers that it “cannot be responsible for any funds deposited into the Silvergate bank account,” adding that customers who chose to deposit anyway did so “at your own risk.”

Nayib Bukele, the ‘millennial dictator’ who runs El Salvador, has yet to weigh in on Silvergate’s imminent demise, despite the bank being a major partner in the country’s botched effort to make the BTC token legal tender. Silvergate facilitated USD transactions for El Salvador’s Chivo digital wallet, although the use of the wallet effectively evaporated once citizens had claimed the US$30 in free cash that came with downloading Chivo.

Michael Saylor’s MicroStrategy (NASDAQ: MSTR) issued a statement trying to quell suspicion that Silvergate’s plight would negatively impact its operations. MacroStrategy, the offshoot set up to hoard Saylor’s roughly 130,000 BTC tokens, borrowed $205 million from Silvergate in March 2022, putting up around $820 million worth (at the time) of Saylor’s BTC as collateral.

On Thursday, MicroStrategy reminded “anyone wondering” that its Silvergate loan didn’t come due until Q1 2025. The statement added that this loan “wouldn’t accelerate b/c of SI insolvency or bankruptcy. Our BTC collateral isn’t custodied w/ SI & we have no other financial relationship w/ SI.”

Ironically, it was only one month ago that Saylor was defending Silvergate on CNBC, saying they’d “handled themselves admirably given the stress of the situation. And yes, we will continue to do business with Silvergate … They’re a good citizen for the ecosystem.”

Our heart will go on; our business model won’t

The sheer number of high-profile crypto firms directly or indirectly impacted by what appears to be Silvergate’s inevitable bankruptcy—and the increasing likelihood of rival Signature getting out of crypto altogether—underscores the paper-thin reasoning of the ‘unbank yourself’ crowd.

For too long, crypto bros thumbed their noses at regulators, and law enforcement, insisting that they were the next generation in the evolution of finance and the traditional banks were dinosaurs stuck in the La Brea Tar Pits. Turns out crypto bros need the ability to transact in U.S. dollars more than the financial stegosauruses need crypto.

There’s obviously money to be made providing the rails on which fiat-to-crypto-and-back-again payments travel, assuming the crypto firms don’t go bankrupt or get indicted. But that filthy lucre comes at a cost, including heightened regulatory scrutiny that could expose other non-crypto activities a bank might not want to celebrate too loudly.

The crypto casino companies may momentarily take comfort in their ability to pivot some of their operations from Silvergate to Signature. In reality, this is akin to the shivering survivors in a post-iceberg RMS Titanic lifeboat breathing a sigh of relief because the RMS Lusitania has come to rescue them. Don’t get too comfy on that foredeck, guys.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.