Crypto bank Silvergate’s worsening losses feed regulators’ worst fears

NEW YORK – For months, the United States authorities have been racing to sever ties between banks and risky crypto ventures, worried that the financial system could some day suffer serious losses. They may have been too late.

In the starkest warning yet by a US bank catering to the sector, Silvergate Capital said on Wednesday that it needs more time to assess the extent of damage to its finances stemming from last year’s crypto rout – including whether it can remain viable. Its shares plunged as much as 33 per cent after the close of regular trading.

The firm, which already reported a US$1 billion (S$1.34 billion) loss for the fourth quarter, said the figure could climb higher. The company is still tallying the cost of rapidly selling assets to repay advances from the Federal Home Loan Bank System. It may also need to mark down the value of some remaining holdings.

This could result in the firm “being less than well-capitalised”, California-based Silvergate wrote in a regulatory filing. “The company is evaluating the impact that these subsequent events have on its ability to continue as a going concern.”

Such an admission by a lender with federally insured deposits and more than US$11 billion in assets will add to a debate among US lawmakers and regulators over whether banks can manage the risks associated with digital assets.

For a time, Silvergate excited its shareholders with what seemed like a novel approach: soaking up cash deposits from crypto ventures to invest in more staid securities. But when Sam Bankman-Fried’s FTX empire collapsed in November, the bank’s customers withdrew en masse to weather the storm.

“It confirms the fears that many regulators have had,” said Mr Todd Baker, a senior fellow at Columbia University’s Richman Centre for Business, Law and Public Policy. “If this bank fails, it is going to be held up as an example of why banks should be extremely conservative in dealing with crypto companies.”

Even if that does not happen, Silvergate’s travails will stoke even greater caution on the part of regulators, he said.

Regulators’ warnings

Indeed, a US crackdown has already begun.

In early January, three top financial regulators – the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp – issued a blunt warning to banks that crypto-related risks that cannot be controlled should not be allowed to infect the banking system.

Later that month, the Fed piled on with a policy statement as it turned down a bid by crypto firm Custodia Bank to get coveted access to the central bank’s payment system.

Last month, Bloomberg reported that Binance Holdings, the world’s largest cryptocurrency exchange, is mulling over whether to end its relationships with US partners amid the stricter regulatory regime.

Silvergate’s stock tumbled more than 88 per cent last year, first as crypto prices slid and later as FTX collapsed. The shares have been on a roller coaster ever since – at one point swinging by more than 50 per cent in a single day – as investors struggled to gauge the company’s prospects for reviving itself.

The stock rose in mid-January as the company outlined steps for moving on. But at the end of the month, a bipartisan group of US senators accused Silvergate of being “evasive” about the extent of its ties to FTX and Bankman-Fried’s Alameda Research investing arm. Days later, Bloomberg broke the news that the Justice Department’s fraud unit is looking into the bank’s dealings with FTX and Alameda.

On Wednesday, Silvergate listed the Justice Department’s probe and increased regulatory scrutiny among factors that could ultimately affect financial results.

Its legacy in the crypto market, and the broader regulatory crackdown, could also complicate any efforts to find a buyer.

The bank’s troubles, in turn, might have implications for cryptocurrencies.

Its current predicament will make other banks all the more reluctant to work with crypto ventures, resulting in a chilling effect on that industry, said Mr Henry Elder, head of decentralised finance at digital asset manager Wave Financial.

“You are certainly not going to see anyone come out as a crypto bank until there is more clarity,” he said. BLOOMBERG