Crypto-focused bank Silvergate plans to wind down following blow from FTX

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March 8 (Reuters) — Cryp­to-focused bank Sil­ver­gate Cap­i­tal Corp (SI.N) said on Wednes­day it planned to wind down oper­a­tions and vol­un­tar­i­ly liq­ui­date after it was hit with loss­es fol­low­ing the dra­mat­ic col­lapse of cryp­to exchange FTX, send­ing its shares down 35% in after-hours trade.

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

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

In a state­ment, Sil­ver­gate said the deci­sion to wind down its bank was “the best path for­ward” in light of “recent indus­try and reg­u­la­to­ry devel­op­ments.” Its wind-down and liq­ui­da­tion plan includes full repay­ment of deposits, the bank added.

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Mul­ti­ple part­ners of the bank, includ­ing high-pro­file firms such as Coin­base Glob­al Inc (COIN.O) and Galaxy Dig­i­tal, sev­ered ties with Sil­ver­gate last week.

After Sil­ver­gate’s state­ment, cryp­to exchange Coin­base said it has no client or cor­po­rate cash at Sil­ver­gate, while Binance chief Chang­peng Zhao said the com­pa­ny did not have any asset loss­es at Silvergate.

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

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

Found­ed in 1988, Sil­ver­gate ven­tured into cryp­to in 2013. The bank had also oper­at­ed a mort­gage ware­house busi­ness, but announced in Decem­ber that it would be wind­ing down that divi­sion, cit­ing the ris­ing inter­est rate envi­ron­ment and reduc­tion in mort­gage volumes.

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

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

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

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

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

In a state­ment, the Cal­i­for­nia Depart­ment of Finan­cial Pro­tec­tion and Inno­va­tion, which super­vised Sil­ver­gate under a state char­ter, 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.

More than a tril­lion dol­lars in val­ue were wiped out from the cryp­to sec­tor in 2022 with ris­ing inter­est rates exac­er­bat­ing wor­ries of an eco­nom­ic downturn.

After rapid growth in 2020 and 2021, bit­coin — the most pop­u­lar dig­i­tal cur­ren­cy by far — fell more than 60% last year, pres­sur­ing the dig­i­tal assets industry.

Report­ing by Han­nah Lang in Wash­ing­ton and Anir­ban Chakrobor­ti in Ben­galu­ru; Addi­tion­al report­ing by Manya Sai­ni and Mrin­may Dey in Bengaluru
Edit­ing by Maju Samuel, Matthew Lewis and Lin­coln Feast.

Our Stan­dards: The Thom­son Reuters Trust Principles.

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