For years, the California-based Silvergate Bank has served as a financial backbone to the crypto industry as traditional institutions stayed away from the volatile sector.
After severe losses suffered from the collapse of FTX and the broader bear market, Silvergate’s crypto bet may be nearing its end as the bank loses key customers and faces federal investigations.
On Wednesday, Silvergate submitted a notice to the U.S. Securities and Exchange Commission that it would be unable to file its annual report on time, citing regulatory and financial uncertainty. Shares opened on Thursday down more than 45%.
“The Company is evaluating the impact that these subsequent events have on its ability to continue as a going concern,” Silvergate wrote in the filing, adding that it is in the process of reevaluating its businesses and strategies.
This comes less than two months after the bank reported a net loss of $1 billion for the fourth quarter of 2022, even as CEO Alan Lane insisted that the company’s “mission has not changed.”
Silvergate was founded in 1988 as a savings and loan association but transitioned into serving the digital assets industry as crypto rose in popularity. The move was lucrative during crypto’s bull market, as Silvergate’s share price grew more than 1,500% between November 2019 and November 2021.
Crypto came to dominate its business. By September 2022, 90% of its deposit base came from crypto firms. As of mid-January, Silvergate served more than 1,500 digital currency and financial technology companies.
One of its main clients was FTX, whose collapse in November sent shockwaves through the ecosystem—and Silvergate’s business model. The bank drew criticism from lawmakers, including Sen. Elizabeth Warren (D-Mass.), who wrote a December letter with two other senators seeking information related to the relationship between Silvergate and Sam Bankman-Fried's fallen empire.
Even as Silvergate posted massive losses and its share price dropped precipitously, Lane maintained that Silvergate would continue down the crypto path. Its SEC filing on Wednesday seems to change that direction.
Silvergate announced it had sold investment and debt securities in January and February 2023 to repay a controversial $4.3 billion loan late last year from the Federal Home Loan Bank of San Francisco—a source of consternation from senators—and disclosed that it was facing investigations from banking regulators and the U.S. Department of Justice.
On Thursday morning, Coinbase announced that it would no longer accept or initiate payments to or from Silvergate, adding that it has no “de minimis,” or significant, corporate exposure to Silvergate. Coinbase cited “recent developments” and an “abundance of caution” for the decision.
At Coinbase all client funds continue to be safe, accessible & available.
— Coinbase (@coinbase) March 2, 2023
In light of recent developments & out of an abundance of caution, Coinbase is no longer accepting or initiating payments to or from Silvergate.
"As a matter of policy, Silvergate cannot comment on specific customers or their business activities," Silvergate spokesperson told Fortune.
Other crypto companies that work with Silvergate also distanced themselves from the company. In a statement shared with Fortune, a Paxos spokesperson said: "Paxos does not have any material exposure to Silvergate. Paxos’ priority has always been the protection of its customers’ funds and assets, and as such we leverage a diverse network of banking partners." They added that Paxos had discontinued transfers with Silvergate's SEN exchange network, as well as wires to its Silvergate account. Paxos will continue to process outgoing payments.
Circle, the issuer of the stablecoin USDC, said later on Thursday that it would also be unwinding certain services with Silvergate.
1/ We maintain relationships with several banking partners. We are sensitive to the concerns around Silvergate and are in the process of unwinding certain services with them and notifying customers. Otherwise, all Circle services, including USDC are operating as normal.
— Circle (@circle) March 2, 2023
With Silvergate questioning its viability moving forward, the crypto industry is on the brink of losing a crucial financial partner. Adam Cochrane, a partner at the venture capital firm CEHV, tweeted that Silvergate was key to crypto exchanges and market makers.
“Silvergate’s death spiral is going to be rough for crypto,” he said.
Coinbase announced it would be moving to Signature, another crypto-friendly bank, although it is facing financial uncertainty as well, with deposits in the fourth quarter of 2022 dropping 13.8%, thanks in large part to its planned reduction in digital assets partners.
On Wednesday, Bloomberg reported that the crypto exchange Kraken would be pulling back from Signature for some financial transactions due to new guidance from the bank that it would no longer support crypto exchange customers buying and selling amounts of less than $100,000.
