Crypto-focused bank Silvergate plans to shut down after FTX hit By Reuters

By Hannah Lang and Anirban Chakroborti

(Reuters) – Cryptocurrency-focused bank Silvergate Capital (NYSE:) Corp said on Wednesday that it planned to shut down its operations and liquidate it voluntarily after it was hit with losses following the dramatic collapse of cryptocurrency exchange FTX, causing its shares fell 35% after -hours trading.

The decision to close the bank comes after the company warned last week that it was evaluating its ability to operate as a going concern, revealing that it had sold additional debt securities this year at a loss and that additional losses mean the bank it could be “less than well capitalized.”

The dire result for La Jolla, California-based Silvergate, one of the crypto industry’s favorite banks, shows the extent of the impact on the digital asset industry from the fall of FTX, which filed for bankruptcy in November after failing to be able to cover customer withdrawals.

In a statement, Silvergate said the decision to liquidate its bank was “the best way forward” in light of “recent industry and regulatory developments.” Its drawdown and liquidation plan includes the full refund of deposits, the bank added.

Multiple partners of the bank, including high-profile firms like Coinbase (NASDAQ:) Global Inc and Galaxy Digital, severed ties with Silvergate last week.

Following Silvergate’s statement, cryptocurrency exchange Coinbase said it has no clients or corporate cash in Silvergate, while Binance chief Changpeng Zhao said the company had no asset losses in Silvergate.

Silvergate reported a $1 billion loss in the fourth quarter as investors rushed to withdraw more than $8 billion in deposits.

Silvergate has hired Centerview Partners LLC as financial adviser and Cravath, Swaine & Moore LLP as legal adviser, the bank said in a statement.

Founded in 1988, Silvergate ventured into crypto in 2013. The bank had also operated a mortgage escrow business, but announced in December that it was closing that division, citing the environment of rising interest rates and declining volumes. mortgages.

Last week, Silvergate discontinued the Silvergate Exchange Network, its crypto payment network and one of its most popular offerings. That network allowed round-the-clock transfers between investors and cryptocurrency exchanges, unlike traditional bank transfers, which can often take days to clear.

While contagion risks are minimal, given that Silvergate has said it will pay depositors and has outstanding loans, the loss for the Silvergate Exchange Network is disappointing, said Ram Ahluwalia, chief executive of Lumida Wealth, an investment adviser who specializes in in digital. assets.

“It’s more of a strategic loss of critical infrastructure for cryptocurrencies,” he said.

The Federal Deposit Insurance Corporation (FDIC) declined to comment Wednesday when asked about the bank’s failure beyond saying it does not regulate the bank or the holding company. Bloomberg previously reported that the FDIC had been discussing with Silvergate ways to avoid the shutdown.

Federal prosecutors in Washington are investigating the company and its dealings with FTX and the trading firm Alameda Research. In January, three US senators asked Silvergate for details about its risk management and FTX.

In a statement, the California Department of Financial Innovation and Protection, which oversaw Silvergate under a state statute, said it was evaluating the bank’s compliance with financial laws, as well as safety and soundness obligations, and was working with its relevant federal counterparts.

Over a trillion dollars in value was wiped out of the cryptocurrency sector in 2022 with rising interest rates that exacerbated concerns of an economic downturn.

After rapid growth in 2020 and 2021, bitcoin, by far the most popular digital currency, fell more than 60% last year, putting pressure on the digital asset industry.