© Reuters. FILE PHOTO: A representation of cryptocurrency is seen in front of the Coinbase logo in this illustration taken March 4, 2022. REUTERS/Dado Ruvic/Illustration
By Niket Nishant
(Reuters) – Cryptocurrency heavyweights including Coinbase (NASDAQ:) Global Inc and Galaxy Digital on Thursday dropped Silvergate Capital (NYSE:) Corp as their banking partner after the lender’s latest filing raised doubts. about their ability to stay in business.
Coinbase and Galaxy Digital also said they had minimal exposure to Silvergate, which has been plunged into a bank run crisis after the collapse of major crypto exchange FTX in November spooked investors.
La Jolla, California-based Silvergate, one of the most influential banks in the digital asset industry, has drawn the ire of lawmakers in the United States over its dealings with FTX and Alameda.
In January, a bipartisan group of US senators sent a letter to Silvergate, requesting details of the bank’s risk management practices and alleging that its due diligence processes “failed miserably.”
“This does not bode well for the entire crypto market, as Silvergate is a major player in the space,” said Marcus Sotiriou, an analyst at digital asset broker GlobalBlock.
“The outcome of this remains to be seen, but we could potentially see contagion from crypto companies using Silvergate Bank,” Sotiriou added.
Stablecoin issuers Paxos and Circle, digital asset exchange Cboe, and European crypto exchange Bitstamp also suspended their partnerships with Silvergate.
“It is now becoming increasingly difficult for cryptocurrency companies to establish or maintain relationships with a US bank,” said Ivan Kachkovski, a cryptocurrency and currency strategist at UBS.
“This could potentially mean some trend towards offshoring of cryptocurrencies, at least until a more comprehensive regulatory framework is put in place in the US.”
Silvergate was founded in 1988 and ventured into cryptocurrency in 2013. After high interest rates and the bankruptcy of FTX rocked crypto markets last year, the company reported a $1 billion loss in the fourth quarter and reduced headcount by 40% in an attempt to cut costs
Coinbase, previously one of Silvergate’s major clients, said it would partner with signature bank (NASDAQ:) and others to facilitate cash transactions for institutional clients who had funds parked with the exchange.
Shares of Silvergate fell to a record low of $6.80 following the announcement, wiping more than $200 million off its market capitalization.
On Wednesday, Silvergate delayed its annual report, saying it had sold additional debt securities – investments that may include bonds and notes – to pay down debt this year and was assessing the impact of these events on “its ability to continue as a going concern.” .
“The bank has, to some extent, become a lightning rod victim of circumstance given the flow of industry news in recent months,” Canaccord Genuity analysts wrote in a note after the disclosure.
The bank has also become a target for short sellers. Short interest on Silvergate shares is estimated to be up to 22.6 million shares, or 82% of the float, making them the shortest shares in the United States in terms of percentage float, according to data from analysis firm S3 Partners.
