Digital Zeitgeist – The American Cryptocurrency Bank Silvergate Has Collapsed Following The FTX Calamity
The upheaval in the cryptocurrency industry that followed the failure of the cryptocurrency exchange FTX has resulted in the demise of the cryptocurrency-focused bank Silvergate.
After suffering damaging losses as a result of the sudden failure of FTX in November, Silvergate Capital Corp. made an announcement late last night that it intends to voluntarily dissolve Silvergate Bank and bring about its closure in an orderly way.
Silvergate is one of the few mainstream financial organisations that has concentrated on offering services to the cryptocurrency industry. This makes Silvergate a unique player in this space. This contributed to its rapid expansion up to the beginning of the so-called “crypto winter” a year ago, when values of crypto assets began a precipitous decline.
Silvergate announced that:
“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of Bank operations and a voluntary liquidation of the Bank is the best path forward.
The Bank’s wind down and liquidation plan includes full repayment of all deposits. The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets.”
After hours trading saw Silvergate’s share price plummet to $2.76, a decrease of 43 percent from its previous level. During the course of the past year, they have dropped by more than 96%.
Silvergate was once a little community bank, but during the height of the cryptocurrency boom, the company reimagined itself one of the most sought-after service providers for businesses that were having difficulty collaborating with traditional financial institutions.
The failure of the cryptocurrency exchange FTX, which was owned by Sam Bankman-Fried and occurred last November, triggered a crisis of trust in the industry and compelled investors to withdraw their funds from Silvergate.
The bank reported at the beginning of January that customers had withdrawn more than $8 billion (£6.7 billion) of their crypto-related deposits during the final quarter of the previous year. As a result, the company was forced to sell billions of dollars’ worth of assets in order to protect its balance sheet.
When the news of the failure of the FTX exchange spread across the world of cryptocurrencies during the last three months of 2022, users withdrew more than two-thirds of their deposits from the exchange.
Even though the majority of the effects of the collapse have so far only been felt by other organisations and individuals involved in cryptocurrency, which has limited the “contagion” to the wider economy, Silvergate, which is otherwise a conventional bank, has been forced to take extraordinary action in order to protect its balance sheet.
The bank reported on Thursday that it had been compelled to sell assets worth $5.2 billion for cash “in order to accommodate sustained lower deposit levels and to maintain a highly liquid balance sheet.” As a result of these transactions, the bank recorded a loss of $718 million.
“In response to the rapid changes in the digital asset industry during the fourth quarter, we took commensurate steps to ensure that we were maintaining cash liquidity in order to satisfy potential deposit outflows, and we currently maintain a cash position in excess of our digital asset related deposits,” said Alan Lane, the chief executive of Silvergate.
The bank attributed the withdrawals to a “crisis of confidence across the ecosystem” that had led many to seek to reduce their risk to digital assets.
“We are in a period of ‘shoot first, ask questions later’ for any bad news related to crypto and crypto-related businesses,” said Thomas Hayes, the chair and managing member at the investment firm Great Hill Capital.
“We expect this carnage to continue for some time as there is no way to value the underlying asset.”
Alameda Research, the hedge fund that Sam Bankman-Fried established and which was ultimately responsible for the failure of FTX, was one of the most critical customers for Silvergate. FTX used the bank account at Silvergate, which belonged to Alameda, to accept wire transactions that were sent to the exchange from customers. They ultimately remained in Alameda’s accounts as opposed to being transferred to FTX’s accounts.
Because of this missing money, FTX’s books had a $8 billion hole in them, which prevented the company from satisfying client withdrawal requests during a run on the exchange in November.
In the United States three federal financial agencies – the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have previously given statements warning banks that issuing or holding cryptocurrency was “highly likely to be inconsistent with safe and sound banking practices.”
online sources: theguardian.com, silvergate.com