Silvergate Bank has formally entered liquidation after its big bet on ‘crypto’ turned up snake eyes, leaving other financial institutions second-guessing their own positions.
On Wednesday, Silvergate Capital Corporation (NASDAQ: SI) announced its intention to “wind down operations and voluntarily liquidate the Bank in an orderly manner and in accordance with applicable regulatory processes.” The statement added that ‘in light of recent industry and regulatory developments, Silvergate believes [this] is the best path forward.”
The California-based Silvergate stressed that its liquidation plan “includes full repayment of all deposits” and “deposit-related services remain operational.” Except those associated with the Silvergate Exchange Network (SEN), the proprietary 24/7 crypto settlement platform, which the bank shut down last week, despite its popularity with digital asset exchanges and institutional investors.
Silvergate’s statement noted that it was trying to “preserve the residual value of its assets, including its proprietary technology.” That suggests a belief that some other financial institution or investor group could see value in rebooting SEN at some future date, presumably when the regulatory climate appears more forgiving. (We’re thinking January 2047?)
The California Department of Financial Protection issued its own statement Wednesday, saying it was “monitoring the situation closely to facilitate the safe and expeditious voluntary liquidation … The Department is evaluating compliance with all financial laws, as well as safety and soundness obligations, and is working closely with relevant Federal counterparts.”
Silvergate’s woes began in earnest following last November’s collapse of the FTX exchange, which was among SEN’s most active users. Crypto depositors rushed to withdraw their funds from Silvergate, sparking a bank run for which Silvergate was ill-prepared. Silvergate had invested much of its capital in long-term U.S. bonds and securities, positions it was forced to redeem at a roughly $1 billion loss in order to meet its withdrawal obligations.
The Federal Deposit Insurance Corp (FDIC) sent agents to Silvergate’s offices last week to poke through its books and determine whether the bank was worth saving. Vague talk of unspecified ‘crypto investors’ stepping up to rescue Silvergate evidently came to naught, leading to Wednesday’s ‘turn out the lights, the party’s over’ announcement.
As bad as it is, things could get much worse for Silvergate’s management, who remains under federal investigation due to their alleged facilitation of FTX founder Sam Bankman-Fried’s fraudulent banking practices. Silvergate was flagged by federal prosecutors for failing to conduct adequate due diligence when SBF submitted applications by fake shell companies for new SEN accounts.
Silvergate’s share price cratered in after-hours trading following Wednesday’s announcement, and the rout continued Thursday, closing down 42% to just $2.84.
Silvergate appears to have sparked fears in other tech-friendly financial institutions, with shares of Silicon Valley Bank’s parent company SVB Financial Group (NASDAQ: SIVB) falling over 60% on Thursday. Following some loss-making investments, SVB announced a $1.75 billion share sale late Wednesday, which prompted some venture capital firms to urge portfolio companies to withdraw their deposits ASAP.
Not your average Blockheads
Among those urging companies to get out of SVB is Peter Thiel’s Founders Fund. Thiel’s sense of urgency may have to do with the fact that Block.one, the Thiel-backed developer behind the EOS protocol, was one of the biggest losers from Silvergate’s demise.
Block.one and its co-founder, CEO Brendan Blumer, chose to swim against the current by increasing their stake in Silvergate following FTX’s collapse. They ultimately held a combined 9.9% stake, making them Silvergate’s biggest holder. Sadly, that holding’s value fell from $90 million in November to $54.5 million by the end of December, then fell another 70% since the year began.
On Wednesday, Block.one admitted that it had “exited our Silvergate equity position” at a loss estimated at around $83 million. (Guess Blumer’s not going to be welcome in Thiel’s New Zealand doomsday bunker when the zombies strike, huh?) Despite being “disappointed with this outcome, [Block.one] remain unwavering that banks and other financial institutions” that embrace crypto will do just fine.
Block.one co-founder Brock Pierce—who also co-founded the company that morphed into the Tether stablecoin—offered a fitting eulogy via his LinkedIn for Block.one’s bad Silvergate bet. “At the time, it looked like probably a smart move … They always talk about trying to catch a falling knife … it appears what’s happened here is the downside of attempting to do that.” Insightful.
Short-selling Signature
At the other end of the country, New York-based Signature Bank felt the need to issue ‘updated financial figures’ on Thursday, stressing its “strong, well-diversified financial position and limited digital-asset related deposit balances.”
Like Silvergate, Signature has its own 24/7 crypto settlement platform called Signet, but Signature has been actively downplaying its crypto involvement ever since FTX’s collapse. Signature CEO Joseph DePaolo reminded the markets that “our relationships in the digital asset space are limited to U.S. dollar deposits only, and we remain fully committed to executing on our plan to deliberately reduce these deposits further.”
The markets weren’t entirely placated by DePaolo’s assurances, as Signature stock fell over 12% Thursday, closing at $90.76, about one-third of the stock’s value at this time last year.
DePaolo announced last month that he’d soon be stepping down as CEO in favor of current chief operating officer Eric Howell. While DePaolo will continue to serve in an advisory capacity and will remain on Signature’s board, it’s unclear how much the ongoing crypto collapse contributed to this CEO shuffle.
Ominously, Marc Cohodes, one of the short-sellers that aggressively targeted Silvergate, has begun likening FTX’s relationship with Silvergate to Signature’s former ties to the controversial Binance exchange. Signature gave Binance the boot from Signet in January after online sleuths revealed that Binance was doing business with the bank under the guise of a Seychelles-registered shell company.
Cohodes poured derision on Signature’s financial update, saying “the issue of $SBNY is SIGNET, not what is in their worthless press release.” Cohodes claimed that Signet “caters to Worldwide Financial Criminals with Little/Zero KYC/AML testing” and warned that “Signet needs to close and close at once.”
Gemini denies JPMorgan breakup
Across town, the Gemini exchange run by Cameron and Tyler Winklevoss issued a tweet on Wednesday denying a CoinDesk report that JPMorgan Chase & Co had turfed Gemini as a banking client. Gemini claimed that “despite reporting to the contrary, Gemini’s banking relationship remains intact with JPMorgan.”
Sadly for the Winklevii, Reuters almost immediately confirmed the original report, citing a source “familiar with the situation.” JPMorgan has yet to comment on the reports, and, technically speaking, Gemini’s ‘remains intact’ statement could very well reflect reality, at least for the rest of this week. Then again, this would hardly be the first time that Gemini was accused of lying about its operations.
JPMorgan onboarded both Gemini and rival exchange Coinbase in 2020, and while Coinbase’s (NASDAQ: COIN) relationship with JPM appears intact, the Gemini jettison reflects the mainstream banking sector’s increasing unease about maintaining ties to crypto firms, particularly those that have demonstrated very bad judgment.
Gemini was among the crypto firms that cut ties with Silvergate last week after the company delayed the filing of its annual 10K report with the U.S. Securities and Exchange Commission (SEC). Gemini was already dealing with a $900 million hole in its balance sheet due to poor decision-making at its Earn division, a situation that only recently began to offer signs of hope.
Federal shots fired
In January, the U.S. Federal Reserve, FDIC, and the Office of the Comptroller of the Currency (OCC) issued a joint statement warning banks about the key risks posed to their operations by associating with crypto firms.
On Thursday, the Fed’s vice-chair for supervision Michael Barr gave a speech at the Peterson Institute for International Economics in Washington, DC. Barr’s speech focused on “what we have learned from the recent turmoil in the crypto sector and what role supervision and regulation should play in helping banks manage their engagement with the sector.”
Barr offered an anecdote regarding a chat with some Mississippi college students, many of whom owned crypto and “weren’t very happy” about how much money they’d lost on their ‘investments.’ Barr cited statistics indicating that one-fifth of Americans – “many of them with limited savings” – have owned some form of crypto at some point, making the impact of the current collapse both deep and wide.
Barr took a dig at “certain crypto assets … which have no intrinsic value beyond the faith of their owners.” Barr also noted that while many digital assets are “hyped as ‘decentralized,’ there has been an emergence of new, quite centralized intermediaries that are either not subject to or not compliant with appropriate regulation and supervision.”
Echoing SEC boss Gary Gensler’s view that regulators already have all the laws they need to oversee crypto, Barr appeared to dismiss crypto’s view of itself as above existing securities laws. Barr said the Fed’s view is that “activities that are fundamentally the same should be regulated the same, regardless of where or how the activity occurs or the terms used to describe the activity.”
Barr closed by directly referencing stablecoins, noting that issuers “represent that their liabilities can be redeemed on demand at par, a dollar for a dollar … Even if the assets backing the claim are high quality, they cannot necessarily be immediately monetized, and operational risks are quite high … This mismatch in value and liquidity is the recipe for a classic bank run.”
“An unregulated, unsupervised, deposit-like asset could create tremendous disruptions, not just for financial institutions but for people who might rely on the coin if it were to get wide adoption. We must learn from the past to ensure that we do not allow for new forms of unregulated private money subject to classic forms of run risk, and with the associated spillovers and systemic implications for households, businesses, and the broader economy.”
On that note, let’s close with a song, shall we?
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