Silvergate Eyes Pearly Gates as Crypto Bank Shuts Down and Liquidates

One crypto bank is no more — and one wonders what’s next for the crypto banking business model itself.

To that end, Silvergate Capital said Wednesday night (March 8) that it would wind down operations and voluntarily liquidate Silvergate Bank.

And in the release announcing the wind-down, the company said it is “considering how to best preserve the residual value of its assets.”

Amid that wind-down, the company has said its liquidation plan includes the “full repayment” of all deposits.

As to what that deposit base looks like and for the ultimate claims on the business, some additional details will likely be forthcoming. As recently as last week, as noted here, the company said it would delay filing its annual report with the U.S. Securities and Exchange Commission (its 10-K) while it examined its ability to continue as a going concern.

A Going Concern No Longer

We now have an answer to the “going concern” question. The Wednesday liquidation announcement comes in the wake of reports earlier in the day that Silvergate had been in talks with the FDIC to see how it might be able to continue operating.

The probes were mounting from the likes of the Department of Justice Department. But we contend that among the most crippling blows to the business were the desertions from key customers such as Coinbase, Paxos and others (and FTX, which had held a reported $1 billion of deposits, imploded last year). At the end of the most recent quarter, as detailed in the company’s earnings presentation, the “crisis of confidence” across the crypto industry caused deposits at Silvergate to plummet to $3.8 billion at the end of last year, off from $11.9 billion in the previous year. The company used wholesale funding to satisfy those outflows (in other words, to cover the withdrawals) and also sold debit securities to keep going.

That aforementioned crisis of confidence may reverberate: As of this writing, Silvergate shares had plummeted by more than 40% after hours. Bitcoin was off by more than 2%. Reached for comment on Wednesday, a Silvergate spokesperson told PYMNTS that the company had nothing to add beyond what has been publicly announced.

The fallout will initially hit some of the traditional financial/investment players that have had a stake in Silvergate, where Citadel Securities and BlackRock have a respective 5.5% and 7% stake in the company – and those holdings were disclosed in recent weeks.

But against the larger backdrop, the divide between traditional banking and crypto firms may become a chasm. Putting aside the fact that crypto firms are cutting edge, at least to their champions — they must still exist, in part, within the traditional financial services ecosystem. That means having bank accounts, cash, and deposits and withdrawals to do everything from paying staff to buying computer equipment to, well, you name it. There’s another large crypto bank out there: Signature Bank. It has been actively reducing at least some of its exposure to crypto by reducing the deposits exposed to the sector

to 15% from 23%.

The list of providers, so to speak, of traditional banking services to the crypto upstarts is shrinking. And it may be the case that there winds up being a premium on services deployed to crypto clients in an industry that will only be marked by more regulation and volatility. (Only 10% of incumbent financial institutions (FIs), per PYMNTS’ findings had been offering enterprises access to crypto, so the list of alternatives is a short one.)

Elsewhere, Silvergate’s liquidation — planned, yes, and ostensibly orderly — will give fodder to tighter reins from the halls of Congress and elsewhere.

We’ve noted before that in the January joint statement from the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. — the concerted concerns are over “significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flow associated with crypto-asset companies” and “contagion risk within the crypto-asset sector resulting from interconnections among certain crypto-asset participants.”

As Thursday, March 9, dawns, we’ll start to see what the contagion risk and interconnections bring to the crypto ecosystem in the post-Silvergate era.