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Silvergate in crisis: Billions withdrawn as DCG faces bankruptcy

Posted:Jan 20, 2023 16:12 Category: Americas , Crypto , Payments , Posted by Content Team

Financial service provider and crypto-friendly bank Silvergate posted a loss of $945 million in the final quarter of 2022.

The massive losses in the last weeks have hit the Genesis group subsidiary hard, forcing the bank to cut 40% of its staff. The bank expects to put down another $8.1 million in order to restructure, some of which will go to severance packages.

In the last quarter of 2022, clients withdrew a record $8 billion from the bank as cryptocurrency markets tumbled in the wake of the FTX blowout. The bank’s largest customers, FTX and Alameda Research, filed for bankruptcy protection in November following the scandalous unraveling of the sibling companies’ operation.

As Silvergate liquidated assets to redeem an avalanche of redemption requests, the bank lost hundreds of millions of dollars. It was forced to sell bonds and other illiquid assets and securities before they hit their maturities, resulting in a cataclysmic loss and a gaping hole in its balance sheet. The bank will also dish out a $134 million impairment charge for securities it is prematurely selling in Q1 2023.

Institutional downgrades

Since then, JPMorgan Chase downgraded the crypto-focused bank, stating that Silvergate Capital’s worse-than-expected outflows of deposits in the fourth quarter will have negative effects on the company’s long-term profitability. Separately, rating agency Moody’s, downgraded the bank’s long-term deposit ratings to junk status, based on recent events.

“These events highlight Silvergate Bank’s significant operating challenges, in particular the profitability, funding, and liquidity risk associated with amplified deposit volatility driven by uncertainty in the cryptocurrency market and the bank’s narrow business model,” said Moody’s senior analyst Sadia Nabi.

String of bankruptcies

The heavy loss is in stark contrast with the bank’s $76 million net income in that same quarter the previous year. Indeed, it’s been a tough year for both the crypto space and Silvergate, which was Alameda Research’s primary bank.

The firm had instructed FTX customers to make deposits by wiring money to Alameda Research’s Silvergate account. At the time of the exchange’s bankruptcy filing, per Silvergate, Sam Bankman’s Fried now-bankrupt companies accounted for less than 10% of the $11.9 billion in deposits from Silvergate’s crypto clients.

The bankruptcy and freezing of exchange funds triggered a bank run where Silvergate customers withdrew 68% of all deposits held on behalf of crypto clients. Between September 30th and December 31st, Silvergate shed 52 crypto customers. The bank’s collateral stood at $1.1 billion on December 31, down about $400 million from September 30, 2022.

In plain English, this indicates that some entities aggressively liquidated assets to pay off loans and free up collateral.

Silvergate attempts a positive spin

Besides issuing its standard quarterly reports, the wounded bank told Bloomberg that it preferred not to comment on client activity. A spokesperson said insisted that Silvergate is a fully regulated bank with a proprietary regulatory compliance approach.

In spite of all this, the bank hasn’t given up on the digital asset space yet. The bank’s CEO, Alan Lane repeated in his latest earnings announcement: “While we are taking decisive actions to navigate the current environment, our mission has not changed. We believe in the digital asset industry”.

Senators don’t take the bait

Suffice it to say that critics weren’t convinced by the CEO’s resolve. Silvergate now faces an investor lawsuit alleging that it misled clients about its business and financial health, which hurt its stock price. The firm’s stock was down 90% in 2022, and fell below $14 by January 17, 2023.

Considering its all-time high of $240 in November 2021, the bank’s catastrophic collapse is palpable.

A group of US senators spearheaded by Democrat Elizabeth Warren sent letters to major firms about the bankrupt exchange FTX. The letters included one to Silvergate, which inquired as to why the bank didn’t flag suspicious transactions originating from the bankrupt exchange.

The ongoing high-profile criticism of the bank may have inspired the bank’s CEO to reiterate his claims about regulatory compliance. On December 6th, Lane repeated this claim in response to the Senator’s queries.

“Silvergate conducted significant due diligence on FTX and its related entities, including Alameda Research, both during the onboarding process and through ongoing monitoring,” Lane said in his response.

But the veil may have been lifted once and for all.

On Wednesday 18th January, Genesis Global Capital, the institutional crypto brokerage firm at the centre of an ongoing conflict between financially troubled parties Gemini exchange and Digital Currency Group (DCG), is reportedly set on filing for Chapter 11 bankruptcy protection. In effect, this renders the claims coming from the group’s subsidiary bank, Silvergate, probably null and void.

The group reportedly owes its creditors around $3 billion.

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