The crypto winter is coming for Silvergate Capital

Silvergate Capital is in trouble.

The California-based company had become a popular place for cryptocurrency companies to bank. But in a regulatory filing on March 1, Silvergate wrote that it is concerned that it could soon become “less than well-capitalized,” which is one way to put it.

In January, Silvergate reported losses for the fourth quarter of 2022 totaling more than $1 billion and warned that those losses could keep mounting. The company also cut 200 jobs — about 40% of its workforce — in January, citing “the economic realities facing the digital asset industry today.”

The company’s stock has plummeted too. It is now down from an all-time high of $220 per share on Nov. 19, 2021 to below $8 per share today — an all-time low. This new low came after the company admitted that the US Department of Justice may be investigating it — reportedly over its involvement with the collapsed crypto exchange FTX. JPMorgan also downgraded the stock from “neutral” to “underweight” and Coinbase, a publicly-traded crypto exchange, announced it is dropping Silvergate as a banking partner.

What is Silvergate Capital?

Silvergate is a federally insured bank that deals—in a roundabout way—with cryptocurrencies. Rather than issue deposits and withdrawals in bitcoin, ether, or another digital coin, however, the company set up an instant payments network for cryptocurrency-focused clients, like crypto exchanges and cypto investors, to move large amounts of fiat money between one another rapidly — and on nights and weekends when a traditional bank is usually closed.

So even though Silvergate doesn’t deal directly with cryptocurrencies, which is a highly speculative asset class, most of its clients do. That means the bank has been hit hard by the broader crypto industry’s failings over the last year.

Silvergate counted FTX, the crypto exchange that collapsed and filed for bankruptcy in November, for instance, as one of its customers. Authorities later arrested Sam Bankman-Fried, who ran and co-founded the exchange. He now faces 12 civil and criminal charges related to fraud.

Congress is investigating Silvergate

A group of US senators, including Massachusetts senator Elizabeth Warren, recently sent Silvergate a letter (pdf) probing its knowledge of FTX’s business practices. The senators also criticized Silvergate in the letter for taking out a loan from the Federal Home Loan Bank of San Francisco (FHLB) to stave off a bank run.

The senators wrote that Silvergate “further introduced crypto market risk into the traditional banking system” by using FHLB as its “functional lender of last resort.” Doing so might give FHLB a claim on the bank’s assets if it should default, ahead of the Federal Deposit Insurance Company (FDIC).